Texas Office Markets Post Mixed Results

The Grubb & Ellis report for Austin shows that after posting negative absorption of 80,697 in the first quarter, the city's office came back in the second quarter byposting 257,195 sf positive absorption. "Despite the healthy overall positive growth, class A saw net absorption totaling a mere 13,654 sf as tenants flocked to cheaper class B space (which registered 204,184 sf of positive absorption) in the face of rising rents and a souring national economy," the report states. New construction totaled approximately 379,000 sfin the second quarter of 2008, a 60% decrease from the first quarter; in the next 12 months, 2.6 millionsf of speculative office space is anticipated throughout the Austin market.

Austin managed a rent increase despite the market conditions, with citywide rental rates rising by 78 cents to $27.87 per sf per year--a record high. Grubb & Ellis expects that, as office buildings continue to trade throughout the Austin area, "rental rates will likely continue their march upward as landlords attempt to meet their investment parameters," but the forecast calls for an eventual leveling off of rates as several million sf of new space enters the market over the next 12 months.

In San Antonio, the rebound produced 145,844 sf of positive absorption in the second quarter. Grubb & Ellis says that the positive gain "offers a sense of comfort that the Alamo City will stay relatively shielded from major disturbances on a national level." With some 1.8 million sf of new office space under development, the majority of new construction is occurring in the North Central and Northwest submarkets. The delivery of the new office buildings is staggered over the next four to six quarters which should help in the absorption of space, according to the report.

Although rents are expected to continue rising, sublease space has increased to 258,475 sf compared to the second quarter of 2007 when subleasespace was 50,170 sf. The 11.9% direct vacancy rate for the quarter represented a decrease of 50 basis points during the quarter, with class A vacancy at 13.2% and class C space tightening to 13.2%, a decrease from 13.5% in the previous quarter. Excluding the South submarket where vacancy increased by 60 basis points, all remaining submarkets posted decreases in vacancy.

In the Dallas/Fort Worth office leasing market, the slowing during the secondquarter still produced 152,992 sf of net absorption, which wasevenly distributed across both the class A and class B sectors. The Grubb & Ellis market survey notes that this is a significant decline from the 579,317 sf of growth recorded during the first quarter. Class C properties registered 111,073 sf of negative absorption, which is a negative swing of more than 250,000 sf from the first quarter. Year to date, the market has absorbed 778,988 square feet, mostly in the class B sector with 742,147 sf.

The report attributes the market's 20.9% vacancy rate primarily to the classC sector, where vacancy increased by 100 basis points to 20.2%. During the second quarter of 2008, the overall full-service asking rents averaged $22.23, which is slightly higher. Research suggests that there may be a trend of class A tenancy relocating to class B space. "The feeling that brokers are getting from prospective clients is that they are open to engaging in conversations regarding possible moves and consolidations," the Grubb & Ellis report says. However, right now most businesses are adopting a wait-and-see approach regarding possible relocations.

In Houston, with a market pumped up by the energy sector, Grubb & Ellis Co.'s research team has tracked 746,333 sf of net office absorption in the second quarter. Results from other reports may vary, but the bottom line is Greater Houston is gaining traction as other metros fall victim to the economy.By Houston's standards, the Q2 absorption is "moderate growth," says Ariel D. Guerrero, assistant vice president of the local office, who's rolling out the team's quarterly report today. In 2007, the region absorbed 6.5 million sf of office space, setting a nine-year record, and 5.5 million sf in 2006. Guerrero doesn't expect that 2008 will beat the last two years, but "Houston's still bucking the trend nationwide."

Grubb & Ellis' senior vice president Keith Lloyd says the bulk of the deal-making is coming from energy and engineering firms, with the Katy Freeway/Energy Corridor holding the lead for absorption and construction. "They are driving that market, pure and simple," he says.

In Q2, the Katy Freeway/Energy Corridor accounted for 216,640 sf or not quite one-third of the total absorption. Its year-to-date total is 633,228 sf, with the CBD at a distant second with 233,042 sf. The Katy Freeway/Energy Corridor submarket, with 16.5 million sf in 146 buildings, is 93.41% leased. Its class A space totals just 249,808 sf and it's 97.15% filled.

The Houston market also has its share of new construction under way, with some tenants already committed to some of the new projects. A case in point is where Core Real Estate LLC has planted Dow Chemical Co. into 280,000 sf of its 343,521-sf Plaza at Enclave at 1254 Enclave Pkwy. The Energy Corridor project will be done in August or September.