HOUSTON—Deal volume in the region plummeted to 8.8 million square feet in 2016, well below the long-term average of 12.2 million square feet. Weak leasing, coupled with a spike in sublet supply, forced landlords to make market-wide adjustments to rent. West Houston and the Energy Corridor posted the sharpest declines, but rents pulled back in Downtown as well, according to the Savills Studley Effective Rent Index.

Oil prices posted a slight rebound in 2016, hovering around the mid-$50 per barrel range for most of the year, but prices did not rise enough to warrant renewed drilling activity. As a result, class-A availability rates ballooned into the 30% range and energy firms continued to shed space.

Anemic leasing kept companies in the driver's seat during 2016 deal negotiations. Extended free rent periods and generous improvement allowances were the norm for businesses willing to commit to term. Tenant effective rent plummeted by 20.3% to 32.39% and is now on par with 2006 levels.

“There is a large amount of supply because energy-using companies have reduced employees,” Mark O'Donnell, executive vice president and director of the Houston office of Savills Studley tells GlobeSt.com. “Companies bought excess space before the downturn and now headcounts have dropped. There is also a lot of sublease space available. Demand is half of normal and we have five years of supply before we get back to normal.”

Total rent fell for the second straight year, declining by 4.4% to $43.68. Net rent dropped by 7.1% to $27.65. Operating expenses fell by 1% but real estate taxes rose by 2.2%. The value of concession packages pushed higher, spiking by 20.1% to $86.47. Tenant effective rent declined by 20.3% to $32.39, while landlord effective rent dropped sharply by 36.3% to $14.47, placing it just above 2011 levels, according to Savills Studley.

Demand is not likely to rebound in the short term and companies have multiple space options to consider, says Savills Studley. Therefore, tenants can expect concession packages and larger companies opting for a renewal may also be able to obtain some incentives.

“Rental rates haven't been lowered but concessions range from a year to 18 months to two years of free rent, and very large TI packages. The TIs were $50 to $60 before and now, the norm is $70 to $80, sometimes going as high as $100 per square foot,” O'Donnell continues to tell GlobeSt.com.

Barring a major geopolitical crisis, prices are not likely to recover to levels that will support drilling and production on a scale last seen in 2013. Leasing volume may bounce back slightly, but not to pre- correction levels, says the report.

The Effective Rent Index focuses on the true cost of occupancy based on actual taking rents rather than on average asking rents. The annual Houston Region report offers real world numbers that reflect negotiated terms, including lease concessions and operating-expense information.

Instant Insights /

Weak Leasing Forces Landlords to Offer Concessions

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