HOUSTON—When it comes to premium office space, it seems there's always a market for it, even in an economic downturn. JLL's 2017 Skyline report reveals that despite consolidations, space give-backs and record sublease levels, Houston's skyscrapers are still outperforming the market, commanding top dollar and capturing the lion's share of leasing activity.

Skyline is JLL's annual look at office space within some of the most sought-after buildings in 57 markets across North America. Specific to the Houston skyline, the vacancy rate of 19.5% remains below the market-wide office vacancy of 22.4%.

“Despite excess available space and erratic tenant demand, Houston's skyline inventory remains well-positioned to attract prime tenants in the market thanks to well-capitalized owners and a growing amenity base,” Eli Gilbert, senior vice president of research, tells GlobeSt.com.

In addition, Houston's eight trophy buildings attracted 64% of deals larger than 20,000 square feet since 2016 despite comprising only 36% of the skyline inventory. Skyline buildings command rents that are on average 28.8% higher than non-skyline class-A rents in the CBD.

“Despite ongoing headwinds in Houston's office market, many tenants in the market are still seeking trophy and class-A-plus space,” said John Pruitt, JLL executive vice president.

Asking rents in Houston's skyline are on average $46.46 per square foot gross as compared to non-skyline class-A buildings in the CBD, which have an average asking rent of $36.07 per square foot gross. When comparing the average asking rents of Houston's skyline to the overall pool of non-skyline class-A buildings across Houston, that premium jumps to 40.6%. Rents in non-skyline class-A buildings across Houston are on average $33.04 per square foot gross.

This means landlords must renovate to remain competitive. New skyline buildings, defined as those built or under construction since 2010, such as 811 Main, 609 Main and 800 Capitol, have capitalized on tenant demand for prime space, capturing approximately 42% of skyline leasing activity in the last year. Tenants have proven willing to relocate for high-quality space, feeding the wave of renovation currently underway across the Houston skyline and broader CBD submarket.

“Landlords understand that trophy buildings don't stay trophy buildings unless they are continuously upgraded to meet current standards for superior office space,” said Pruitt. “We're seeing underutilized spaces from the last generation of office space transformed into collaborative, creative and co-working areas to meet the requirements of the next generation of tenants and the future of work.”

With well-capitalized owners and asking rents holding steady in Houston's skyline, a significant gap between bid and asking prices stymied investment activity throughout 2016. This spread, however, is beginning to tighten and transactions are happening again in Houston as buyers cautiously re-enter the market.

Year-to-date, Houston has recorded approximately $1.3 billion in total transaction volume. A significant improvement from 2016, with just $330 million in total sales volume for the entire year. On par with 2014 and 2015 activity levels, Houston's skyline has recorded one office trade, up from 2016 when no skyline transactions took place.

“We've seen a significant increase in investment activity,” said Rudy Hubbard, managing director, JLL capital markets. “Cautious optimism and the belief that the worst may be behind us has investors feeling more positively about Houston. Many groups who have been on the sidelines waiting for the right opportunity and the right time are beginning to look again.”

Instant Insights /

Downturn Doesn't Dampen Premium Office Demand

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