HOUSTON—Houston's office market undergoes cycles, whereby the supply and demand of office space increases, peaks, decreases and bottoms during a repeating seven-to-eight-year period of time. While key CRE metrics (i.e. vacancy) in those market cycles show that asking rents do not tend to fluctuate accordingly. This is largely because asking rents do not reflect free-market principles that manifest in realized leases, effective rents and concessions, according to NAI Partners' Data Insights October 2016. In light of this, a good way to examine how meaningful information can be extracted from asking rent data will be helpful in guiding professionals in assessing changes in market rents, says the report.

Landlords representing direct space rarely advertise asking rents that are at the bottom of the range they are willing to accept. For this reason, gross and base triple net asking rents for direct space have an upward trend, with little change during down markets. For example, direct asking rents of class-A space during the past two-year downturn in Houston show a change of only $1.21, whereas actual effective rents of closed deals are down $6 to $8 per square foot on average, NAI Partners illustrates.

In contrast with landlords, tenants subleasing office space have a different mindset guiding economic decisions, leading them to be more forthright with asking rents. As a result, sublease asking rents for both class-A and class-B space tend to fluctuate more with true market conditions, as seen with the current and past downturns in Houston, according to the NAI report.

Despite limitations of asking rent data, more information in market conditions and rent trends can be derived through additional analyses of the data. Specifically, when taking the difference between direct and sublease base rent and expressing it as a percentage of direct base rent, much stronger shifts in asking rents can be observed, reflecting truer market conditions. The greater the percentage difference between direct and sublease asking rents, the more likely landlords will discount asking direct rents and hence, the softer the market conditions, says NAI.

“Sublease asking rents tend to fluctuate more closely with actual market conditions than direct asking rents,” J. Nathaniel Holland, chief research and data scientist, NAI Partners, tells GlobeSt.com. “When the slope of the quarter over quarter sublease asking rents is negative, then we see softening market conditions, compared with direct asking rents under the same conditions, which fluctuate very little.”

Currently, there is a 35% gap between sublease and direct base asking rents for class-A buildings, the largest percent difference for those asking rents than at any time during the past 17 years. Likewise, the class-B market has softened but with only a 22.8% difference between direct and sublease base asking rents. In summary, Houston's class-B market is helping to stabilize the more dramatic downturn in class-A buildings, says NAI Partners.

Instant Insights /

Gap in Direct and Sublease Asking Rents is First in 17 Years

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