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HOUSTON-Despite slowdowns in other cities, the Greater Houston office market ended the first quarter strong in occupancy and leasing, with rents inching upward. Market experts predict conditions will stay the course for the rest of this year.

Grubb & Ellis Co. researchers reported absorption backslid 467,382 sf in the first quarter, but blamed it squarely on Hewlett-Packard Co. tossing nearly one million sf of class A space on the market. “That submarket created an anomaly,” says Ariel Guerrero, Grubb & Ellis’ regional client services manager and vice president. “If you were to take the Hewlett Packard consolidation out of the equation, we’d be seeing a little more than 600,000 sf of positive absorption in the marketplace.”

According to Grubb & Ellis, vacancy is 12.6% or 160 basis points lower than the Q1 2007 close. There is 7.6 million sf under construction in the market, which now has 162.6 million sf. Class A rents are averaging $28.89 per sf while class B is $19.44 per sf.

Transwestern Houston’s first-quarter analysis shows positive absorption to the tune of 838,000 sf and a 10.9% vacancy. The research team includes far north Kingwood and Conroe into its count, resulting in a 223.5 million-sf inventory. Transwestern pegs the under-construction space at 7.5 million sf. Its team says class A rents average $26.52 per sf and class B, $18.73 per sf. According to the team, class A office rents rose at an annualized rate of 16.3% during the quarter while class B asks rose 7.8%.

Preston Young, co-managing partner in Houston for Dallas-based Stream Realty Partners LP, says the office market has been tight as demand rises and the lack of financing cuts into the development pipeline. Both factors are making it difficult for tenants to find large blocks of space at lower rates, he explains.

“Out of the seven million sf, or so, of space that’s under construction about 2.4 million sf of that is Downtown, and that won’t come on line for several more years,” Young points out to GlobeSt.com. He says the frenetic activity in the far west submarket is justifying the under-construction space.

Grubb & Ellis senior vice president James Arket says class A space will start to come into the market at the end of this year and consistently feed the supply chain until 2012. As a result, he expects vacancy to level off and even tick up a little in many areas. “In Downtown and the Uptown-Galleria markets, we won’t see that,” he says. “Those vacancies will still remain low, in single digits.”

From the tenant rep’s point of view, Young believes it will be increasingly difficult to find large blocks of office space in those markets for the rest of the year. “The options for tenants will increase dramatically after 2008,” he says, adding “new deliveries will come in 2009 and 2010.”

Guerrero predicts tenants should have a shot at larger amounts of space as early as the end of 2008. “We’ll probably see about 3.5 million sf of new space coming on line this year,” he adds. “It isn’t much, but it’ll provide opportunities for tenants that need the larger space.”

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