Absorption Down, Vacancy Up in Q3

HOUSTON-The recession is leaving its mark on Houston, with the office sector seeing an increase in vacancy and negative absorption during Q3. A expert tells GlobeSt.com that more of the same can be expected in Q4, but when the rebound comes, it’ll be fast.

“We didn’t overbuild the market this time around. There’s some new product coming on line, but nowhere near what we went through in the 1980s,” explains David Baker, executive vice president of office services with Transwestern’s Houston office. “When the rebound comes, it’ll be much quicker than we saw in the past.”

As of now, however, the office market statistics are trending toward the dismal. CB Richard Ellis figures notes a 15.3% vacancy out of a 190.5 million-square-foot inventory, and a whopping negative 610,000 square feet in absorption area-wide. The CB report also shows 2.7 million square feet under construction.

Transwestern’s Delta report is a little less grim, showing total vacancy of 13.2% out of a 240.7-million-square-foot inventory and absorption standing at negative 56,000 square feet. Approximately 4.3 million square feet is under construction. The Transwestern report includes owner-occupied and single-tenant buildings in its statistics, which is why the difference in figures.

Baker tells GlobeSt.com that downward pressure is being exhibited on rents because of both absorption and vacancy. Landlords, he points out, are willing to lower their rates and “reach for deals” as he puts it. On the positive side, this has led to more leasing activity in the market during the past 60 to 90 days. Tenants, meanwhile, seem to be more willing to look at longer-term deals than they were earlier in the year, he notes.

As for the next few quarters, “we’ll continue to see stabilizing concessions, while vacancies will continue upward through part of 2010,” Baker predicts. “Market conditions should start to stabilize by next summer, and hopefully in 2011, we’ll see economic growth and job creation starting to get back on track.”

In the short-term, however, property owners need to keep an eye on the future, rather than panicking and signing a deal now they might regret in a year or so. The market will turn fast, Baker says, and landlords might be in a position they regret if they’re reaching for more tenant-oriented deals.

“Houston is still a top-performing market,” Barker remarks. “Look for it to turn fast, to benefit the landlords.”