First-quarter a mixed bag for commercial real estate

Houston’s commercial real estate sector continues to be a mixed bag, with the lackluster office market staying flat while the industrial and retail sectors continue to charge forward, according to a quarterly update from commercial real estate services firm NAI Partners.

Brokers at the company’s Galleria area office shared insights on the market at a quarterly press update Wednesday. Some takeaways:

OFFICE

The office market is still in a slump — roughly 60 million square feet of office space throughout the metro area lies fallow, a 20.9 percent vacancy rate.

And while some statistics suggest rents have risen, Dan Boyles, an NAI partner leading the tenant representation group, said those

numbers are deceptive.

“The rents that are going up are really gross rents, they’re not net effective rents, which are still under significant pressure,” he explained. In other words, landlords are offering such large concessions that the actual rent received over the term of the lease remains low. Boyles said he is seeing significant concessions in both new buildings and older, lower-quality buildings.

Breaking the 1-million-square-foot mark would put Houston in the league of distribution markets such as Dallas-Fort Worth and Chicago.

First-quarter asking rents for Class A office space averaged $29.54 a foot annually, up $1.45 from the year earlier.

While it’s still a tenant’s market, Boyles said leasing activity has taken more space off the market over the past few quarters, referred to as positive absorption. For the first time in a long time, some NAI clients are discussing expanding their office space requirements. In the first quarter of 2019, the Houston market absorbed half a million square feet.

“Which is marginal,” Boyles said. “But better than the other way around.”

INDUSTRIAL

Houston’s industrial market has historically been dominated by manufacturing functions, but demand for distribution space has increased and is driving a shift in demand.

As a result, said Clay Pritchett, a partner in the industrial and land brokerage services practice at NAI, the scale of the new generation of industrial space is growing, with 1 million-square-foot spec buildings on their way.

Developers used to put up warehouses of 200,000 to 300,000 square feet on speculation, without preleasing. Spec projects now come in regularly at 600,000 to 800,000 square feet.

Breaking the 1 millionsquare-foot mark would put Houston in the league of distribution markets such as Dallas-Fort Worth, Chicago and the Inland Empire in Southern California.

The vacancy rate in the industrial market was 5.9 percent at the end of the first quarter, marking the 30th straight quarter below 6 percent.

The average annual asking rent across the market was 60 cents per square foot per month, up from 56 cents the year earlier.

RETAIL

Mixed-use is becoming a bigger component of retail.

“There’s a big flight to urbanization,” said Jason Gaines, senior vice president, retail services at NAI.

Investors are interested in repurposing empty big box stores into last-mile distribution centers.

In a 350-foot depth building, a developer might put anchor tenants in the front 250 feet and transform the back into a logistics point.

That type of use hasn’t yet arrived in Houston, but these creative conversions are happening in places with more inventory of space such as the Midwest, Gaines said.

Houston’s retail has remained fairly full, with occupancy at or above 94 percent during the last five years.

“The developers have learned to self-police this industry,” Gaines said. “They’re not building a lot of spec anymore.”