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[IMGCAP(1)]HOUSTON-Working 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.

[IMGCAP(2)]Due to the tight conditions, three million sf of the planned construction in the region’s 8.8-million-sf pipeline are earmarked for Katy Freeway/Energy Corridor. “We’ll find out in the next 12 months if there’s enough demand,” Lloyd tells GlobeSt.com. “We are seeing tremendous activity and it appears there is demand.”

Guerrero says it’s been nine years since Katy Freeway/Energy Corridor’s construction count hit this high. Back then, it accounted for 2.1 million sf of the 4.5 million sf that delivered in the region. “We’re kind of seeing the same thing,” he says. “It seems history does repeat itself.

Citywide, the average weighted rent is $32.70 per sf for class A space. In the Katy Freeway/Energy Corridor, class A is $26.33 per sf, well below the Downtown, Galleria and Westchase. As the new “trophy” buildings come on line, Guerrero predicts their rates could end up $45 per sf to $50 per sf gross.

Guerrero says Greater Houston’s rents climbed 20% last year for class A space. “We’ve had 18 months of major rent increases in the city and they will continue to creep up this year,” he says. And, he says the days of full-service rates are in jeopardy. Last year, many owners started to move to triple net rates for their office buildings, a trend that’s expected to continue as well.

“Tenants who signed five years ago, I’m sure they will be getting a little sticker shock,” Guerrero says.

Citywide, class A occupancy is 90.35% and 87.52% across all classes. “There are no bargains,” says Lloyd, a tenant rep. “What’s king for the landlord now is rent. They want annual bumps in the base rent sometimes and free rent is only under extenuating circumstances. It’s pretty much disappeared.”

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