Houston Office Expert: We’re Close to Equilibrium

HOUSTON- Q3 office reports point to positive absorption and moderating vacancy rates. Experts tell GlobeSt.com that large blocks of space are dwindling and, as a result, the market is close to equilibrium, in which neither landlord or tenant has the upper hand.

“We’re at the point of equilibrium to maybe slightly tilted to the landlord,” comments Eric Anderson, executive vice president with Tranwestern’s Houston office. During the next 24 months, it will be more of a landlord-favored market, especially as we get above 90% occupancy, especially in class A space.”

Transwestern’s Outlook report for the metro area points to an area-wide net absorption of 1.4 million square feet.  The report says that companies are continuing to upgrade to class A space while rents are still low. “Companies are choosing class A alternatives when they’re available,” Anderson comments. Area-wide, vacancy was at 12.2% down from 13.6% during the same time a year ago.

Meanwhile, the Houston Office Market Research & Forecast report, issued by Colliers International’s local office, notes an absorption rate of 957,000 square feet, with the suburbs seeing more absorption.  Overall vacancy levels increased by 10 basis points from 15.9% to 16%. The report also points out that, while suburban vacancy decreased 15.6% from 17% year over year, the CBD vacancy increased to 17.6% from 14.9%.

Lisa R. Bridges, Colliers director of market research in Houston, points out one reason for the CBD’s vacancy rise: Hess Corp.  The departure of the firm in 2010 from  Allen Center to its own 844,000-square-foot building developed by Trammell Crow left a large chunk of space on the market which hasn’t yet been filled.  Also creating more space was the merger between Continental Airlines and United Airlines. “That space is coming back on the market a little bit at a time,” Bridges remarks. She adds that tenants wanting to be in class A buildings are not looking in downtown, but rather, are seeking space in other areas such as the Galleria or The Woodlands.

Bridges and Anderson both note that finding larger class A space is becoming increasingly difficult, but for different reasons. Bridges says landlords are holding onto class A space, whereas Anderson points to rising demand. Both are likely right and added to the situation is a lack of development. Because of these trends, “I believe that during 2012 and 2013, we’ll see more absorption in class B space,” Anderson predicts.

Given the apparent market equilibrium, Bridges doesn’t believe there will be too much of a hike in rents in the foreseeable future. “They did increase a slight amount this past quarter, due to tightening vacancies and landlords are playing with raising rents on better leased properties,” she observes. “But I don’t think we’ll see much in the way of rent increases until next year, when space becomes a little tighter.”