Houston Office Concessions Plateau and Industrial Earns Record

HOUSTON—JLL’s third quarter Insight reports for Houston office, industrial and retail show plateauing office concessions, a record year of industrial deliveries and retail becoming dominated by medical office facilities in a bid for convenience. Moreover, multifamily is exhibiting strong fundamentals as the year winds down.

Office Highlights: Modest occupancy gains reverse the losses from the second quarter, says JLL. Specifically, net absorption moves back into the black in the third quarter and vacancy declines by 20 basis points.

There was a wave of new construction, namely, 150,000 square feet at Chasewood Crossing Three and 26,750 square feet of office space at City Place in the third quarter. Concessions for tenants in lease negotiations–while still at high levels–appear to have plateaued despite prolonged weakness in the market.

“Net absorption will continue to be stagnant for the foreseeable future for multiple reasons,” Bryant Lach, JLL vice president of office brokerage, tells GlobeSt.com. “Driving the number down is M&A activity creating staff reductions, relocations from one building to another which typically results in space efficiency and new construction to keep up with demand for high-quality product. Construction prices continue to increase, which is putting pressure on landlords to increase tenant improvement allowance, and driving rates higher in new and proposed office buildings.”

Industrial Highlights:  A new development wave could bring record year of deliveries to Houston, says the JLL report. Following a moderate first half of the year, leasing activity rebounded in third quarter to 5.4 million square feet of deal volume. Construction activity jumped 49.2% to 13.3 million square feet, reaching its highest level since 2016. The significant wave of new inventory has caused supply to outpace demand by almost three to one, year to date.

Retail Highlights: Medical is the new face of retail. The supply-demand balance has kept the retail market stable at 5.6% vacant, while average asking rents have increased to new highs. Moreover, medical professionals are turning to retail to be more accessible to patients.

Multifamily Highlights: Market-wide occupancy and rents continued to tick upward in recent years due to the robust job and population growth Houston is experiencing, says the JLL report. The citywide occupancy is up to 90.3%, the highest quarterly total since the fourth quarter of 2015. And, that occupancy has seen a steady uptick that mirrors the robust job growth Houston is experiencing. Metro Houston created 93,600 jobs in the 12 months ending July 2019.

As a result, stabilized occupancy levels have resulted in positive rental rate momentum. While the trialing 12-month rental rate registers 3% growth, trailing six-month annualized rental rate growth is 4.7%.

Developer and investor confidence has helped spur the oncoming wave of multifamily construction. The pipeline now registers approximately 23,000 units of construction. A great deal of this construction is heavily concentrated in four out of Houston’s 42 tracked submarkets. The market should be equipped to take on the volume of new supply, given strong renter demand, says the JLL report.