Office Vacancy Increases But There are Bright Spots

HOUSTON—The office market displayed mixed results during the second quarter, as leasing activity increased and office-using job growth picked up momentum. However, total availability and direct vacancy both continued to soften, according to an office report by Transwestern.

The increase in vacancy and availability was due to a combination of tenants taking advantage of attractive sublease offerings, thereby increasing direct vacancy upon move, as well as through an additional wave of sublease listings that increased total availability by 0.8%.

Of note, Occidental Petroleum listed approximately 800,000 square feet of sublease space in 3 and 5 Greenway Plaza with a term through 2026. Oxy is leaving its longtime Greenway Plaza space and will relocate into its new building in 2020, at which time the prime Greenway Plaza sublease will be available for occupancy, says Transwestern.

Absorption through mid-year continued in the red, recording negative 1.5 million square feet year-to-date, and marking seven out of the past eight quarters in negative territory. Class-A properties have posted negative absorption for six of the past eight quarters, leading to financial fatigue in the market. This is especially pronounced in product built prior to 2000 as leasing activity has been markedly in favor of either new construction or heavily discounted attractive sublease offerings.

One bright spot is that Ernst & Young LLP recently leased 120,827 square feet at 5 Houston Center at 1401 McKinney St. The office lease is a relocation and extension within the building. Transwestern represented the landlord, Spear Street Capital.

“EY is a long-term highly valued tenant and their decision to make a longstanding commitment to the building is a testament to both the improvements the ownership has underway as well as the continued momentum building on the east side of downtown,” said Transwestern vice president Tyler Garrett. “The new state-of-the-art fitness center, reimagined lobby complete with a new curated coffee concept and a newly constructed tenant lounge were all integral in the tenant’s decision to extend their lease.  These modernizations, combined with the dynamic surrounding neighborhood, proved to be a great match for EY to be able to continue to recruit and retain top young talent in a highly competitive marketplace.”

5 Houston Center is a 580,000-square-foot class-A office tower built in 2001. The building is centrally located around burgeoning new development occurring on the east side of Houston’s Central Business District. Located adjacent to Discovery Green, the building is surrounded by new street-level restaurants, hotels and multifamily projects. The property is located within walking distance of Minute Maid Park, Toyota Center and George R. Brown Convention Center.

“Reflecting the energy, connectivity and diversity of the Bayou City, the redesign will allow our people to work with more flexibility and teaming throughout the day, providing an enhanced work experience,” said Bill Strait, Houston office managing partner, Ernst & Young LLP.

Vice chairman Glenn Dyke, vice chairman Sanford Criner and vice president Jeff Cairns of CBRE represented the tenant.

“The flight to quality trend has never been stronger in our market,” Garrett tells GlobeSt.com. “The most successful landlords are embracing this trend and investing substantial amounts of capital into differentiated amenities as well as activating the common areas, resulting in spaces that are inviting and energized. Gone are the days of the transient lobby experience. Today’s tenants are looking for common areas that serve as a connection point for their employees outside of their formal office space.”

With more than 9 million square feet of sublease space currently available throughout the metro, spec construction on the rise and proposed buildings anticipating landing lead tenants, the near-term future for the leasing environment continues to be one of the most challenging in Houston’s history. Despite these bumps in the road, office-related job growth is back on the rise. Nearly 80,000 jobs were created during the 12 months ending in May, of which, 37,000 jobs were created in the office-using employment sectors.

Additionally, oil prices remain elevated in the mid-upper $60s to low $70s, which is likely to translate into further job growth. As such, the long-term outlook on the Houston market remains bright despite the challenges the market is currently experiencing, Transwestern concludes.