HOUSTON—Office vacancy rates hovered above average between 16% and 21% last year, and construction activity is still high. The deals on the market have been competitive, and there is a significant amount of capital looking for assets in Houston, with the premise that the market is at its bottom and better yields can be realized here relative to other major metros, according to a recent report by Commercial Café.

“Rising interest rates will have a major impact on acquisitions by office REITs in 2018 and create increased focus on development/redevelopment projects,” says Doug Ressler, director of business intelligence, Yardi-Matrix.

However, office employment has not grown significantly, and the study points out that Houston recovery is at least 12 to 18 months away. In addition, the office market continues to struggle, as US crude prices hover around $50 per barrel. According to the US Energy Information Administration, those prices are expected to stay in this range through 2018.

Despite this, the Houston market still remains full of future potential, with many well-located infill properties representing value-add opportunities to investors. In addition, vacancy rates are above average and there is still a lot of buzz in office development. With those factors in mind, Houston remains attractive to both domestic and foreign investors with an eye on long-term gains and more generous yields.

“We see the Houston market on a positive upswing in both commercial and residential CRE sectors, and positioned to grow in 2018,” Ressler tells GlobeSt.com. “For commercial, first crude prices are seeing significant growth of $60/barrel today versus a 2016 sub-$40 barrel low. Capital sees Houston as a market that has all the signs of positive 2018 growth and non-farm payrolls are growing stronger. Mixed-use projects and value add are prime investment strategies. Note the Kirby Collection, which is finishing up in Upper Kirby. It has office, apartments and retail. And, co-working will begin to provide significant growth. Note that WeWork announced that it will open its first Houston location this fall in downtown's 708 Main building.”

Investor influence can be felt in many ways. For example, the Canada Pension Plan Investment Board put $1.2 billion into Houston commercial office buildings, and Greenway Plaza acquired Parkway in 2017. And Brookfield Property Partners ended 2017 with the $875 million purchase of Houston Center.

“On the residential side, the market hit bottom in 2016 and began to turn around last year,” Ressler tells GlobeSt.com. “The hurricane damaged some 15,000-plus units and by the end of 2017, there was significant rent growth and low concessions as flooded homeowners became renters.”

Instant Insights /

Buzz Surrounds Office Development, Investment

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