Houston Office Market: Strong Employment Growth Fuels Leasing

HOUSTON (PMRG) – Strong employment growth fueled Houston’s office leasing market, which had 540,768 sf of quarterly direct absorption, bringing the tally to just over 3.9 million sf for 2014.

Although the Class-A sector had 118,072 sf occupancy loss during the fourth quarter, PMRG said these losses were largely because of Exxon-Mobil, Halliburton and Shell Oil vacating a combined 1.3 million sf and relocating to new corporate-owned projects. Despite the setback, the Class-A sector recorded nearly 2.7 million sf of direct absorption growth for 2014.

The Class-B sector also performed well with 650,484 sf of direct space absorbed during the fourth quarter, bringing the annual total to nearly 1.1 million sf. Although developers delivered 4.4 million sf of new office space in 2014, new supply kept pace with demand as the direct overall occupancy rate remained unchanged at 87.6 percent on a year-over-year basis. However, Class-A direct occupancy rates dropped 110 basis points to 89.5 percent while Class-B improved 100 basis points to 85.6 percent.

PMRG’s 2015 forecast:

• With slower office employment growth anticipated on the horizon, Houston’s office market will experience healthy but slower direct absorption growth — between 2.5 and 3.5 million sf — still exceeding the 20-year historical average of 2.5 million sf.
• Although a significant percentage of Houston’s office construction coming online this year is preleased, the roughly 55 percent of space that hasn’t been spoken for will likely cause overall direct occupancy rates to stabilize in the near-term and decrease slightly toward the end of the year.
• A steady influx of new product coming online will provide tenants numerous opportunities to upgrade their space or expand; however, many of these companies could experience sticker shock as rents have hit record levels within the past year.