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HOUSTON OFFICE MARKET REPORTF I R S T Q U A R T E R 2 0 1 9
PAGE 2
HOUSTONOFFICE MARKETQ1
2019
WADE BOWLINPresident, Property ServicesCentral [email protected]
JOHN SPAFFORDExecutive Vice PresidentDirector of [email protected]
ARIEL GUERREROSenior Vice President, [email protected]
FOR INFORMATION:
TABLE OF CONTENTS
Source: U.S. Bureau of Labor Statistics; Employment Data as of February 2019 All Employees, in Thousands
E C O N O M I C O V E R V I E W
Houston’s economy sustained its steady growth through the first quarter of 2019 as employers expanded their payrolls by 72,600 jobs over the past 12 months ending in February, representing a 2.4% increase for the period. Even though the local economy gained 35,000 fewer jobs last year than initially estimated according to the benchmark revisions released in March by the Texas Workforce Commission, Houston maintained its top ranking among the major metro areas with 73,300 jobs created in 2018. As a result, the metro area’s unemployment rate has fallen to its lowest level since April 2008. Looking ahead, the Greater Houston Partnership is forecasting 71,000 overall jobs in 2019 and the University of Houston’s Institute for Regional Forecasting issued a medium forecast scenario that Houston could average 63,100 new jobs per year through 2021. Both forecasts are built on a $60-$65 oil price assumption.
The energy sector found itself in a downward spiral late last year as record-high oil production and fears of another global oil glut triggered a collapse in WTI oil prices from a high of $76 per barrel in early October down to $45 per barrel in December 2018. However, OPEC’s agreement to production cuts of 1.2 million barrels per day have helped crude oil prices recover to a range that remains profitable for shale. During the first quarter, West Texas Intermediate (WTI) crude oil rose by 33.3% to break through the $60 per barrel mark, its best first quarter performance since 2002. Traders are now watching to see if the production cuts get extended beyond June, when the agreement expires, or if higher prices push the cartel to lift output. Investors also will weigh whether OPEC’s efforts will be enough to blunt the impact of U.S. shale producers, which continue to pump crude at record levels.
ECONOMIC OVERVIEW ...........................................2
OFFICE MARKET ASSESSMENT .............................3
NET ABSORPTION & VACANCY ................................4
RENTAL RATES & LEASING ACTIVITY ......................5
CONSTRUCTION .....................................................6
SUBMARKET STATISTICS & RECENT DEALS ...........7
THE TEAM ...............................................................8
EMPLOYMENT GROWTH BY SECTOR
-6%
-4%
-2%
0%
2%
4%
6%
-120-100
-80-60-40-20
020406080
100120
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 18 19F
Thou
sand
s
Employment Trends
Jobs Added Annual % Change
EMPLOYMENT TRENDS
4.9%
3.5%
3.8K
17.0K
JOBS ADDED
JOBS ADDED
MINING
PROF,SRVCS
1.9%
3.0%
7.6%
0.0%
0.7%
6.0%
1.5%
2.4%
0.7%
1.5%
4.2K
11.8K
17.1K
0.0K
4.2K
6.6K
2.4K
72.6K
(0.8K)
6.3K
JOBS ADDED
JOBS ADDED
JOBS ADDED
JOBS ADDED
JOBS ADDED
JOBS ADDED
JOBS ADDED
JOBS ADDED
JOBS LOST
JOBS ADDED
CONSTR
EDUC.
MANUF
LEISURE
TRADE,TRANS
OTHER
FINANCIAL
TOTALS
INFO
GOV’T
PAGE 3
HOUSTONOFFICE MARKET Q1
2019
O F F I C E M A R K E T A S S E S S M E N T
Houston’s office market remains on the path to a long awaited recovery with 185,290 SF of direct net absorption registered during the first quarter, which comes on the heels of solid leasing gains during the second-half of 2018. This marks the third consecutive quarter of positive absorption, which has helped bring the trailing 12-month direct net absorption total into positive territory for the first time over the prior 10 quarters. The Class A property sector is leading in the recovery with positive absorption in 6 of the previous 7 quarters, totaling 1.7 million SF of occupancy gains over the period. The bulk of these gains have occurred in trophy and new construction projects as the flight to quality trend persists. As a result, Class A direct vacancy rates have slightly declined by 30 basis points to 20.0% since hitting its cyclical peak during the third quarter of 2018.
Even though Houston’s office market continues to be weighed down by significant vacant inventory, large deal activity has picked up over the past year as tenants are taking advantage of new building options as well as the opportunity to strike a deal early and lock-in rental rates. Large deal activity (100K SF+) over the prior 12 months has accounted for 46% of the cumulative space leased above the 10K SF threshold, which is comprised of 21 deals. The most noteworthy major leases signed over the past few quarters include HP, McDermott, Transocean, Waste Management, and Vinson & Elkins, though the net effect of these transactions will result in additional space becoming available as many of these tenants will consolidate multiple locations or simply reduce their footprint with higher density. In order for Houston’s office market fundamentals to improve at an accelerated pace, it will need to experience an increasing number of business expansions, new companies taking up space, and large scale relocation activity from other markets to help fill the abundance of vacant space emptied during the energy downtown.
F O R E C A S T
• The “flight to quality” trend continues as several new projects are either starting construction or are planned, despite the large inventory of available Class A space. This trend will place increasing pressure on landlords to focus upon significant capital improvement programs to enhance their assets and remain competitive with both new office developments as well as existing buildings within their direct competitive set.
• Although leasing activity is expected to increase in 2019 due to the sheer volume of lease expirations in 2020, it may not result in as much direct net absorption as seen in prior cycles as companies are increasingly reducing their overall footprint by moving into higher quality space with a new layout.
• The high volume of sublease space expiring over the next 21 months will also negatively impact occupancy rates as the space becomes direct vacant.
ECONOMIC INDICATORS
WTI CRUDE OIL
JOB GROWTHT-12 MOS
THRU FEB 2019
33.3%YTD CHANGE
2.4%Y-O-Y
Direct Vacancy
Direct Net Absorption(T-12 mos)
Direct Availability
Under Construction
Direct Asking Rents $29.52
3.1M SF
263K SF
22.3%
19.2%
CurrentQuarter
Change from Previous Quarter Year
12-monthForecast
0%2%4%6%8%10%12%14%16%18%20%22%24%
-2,000
0
2,000
4,000
6,000
8,000
10,000
'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
in T
hous
ands
of S
F
Office Market Trends
Direct Net Absorption CompletionsDirect Vacancy % Direct Availability %
OFFICE MARKET TRENDS
$60
73K
MARKET TREND INDICATORS
PAGE 4
HOUSTONOFFICE MARKETQ1
2019
-1,000
-500
0
500
1,000
1,500
'14 '15 '16 '17 '18 '19
In Th
ousa
nds o
f SF
Direct Net Absorption
Class A Class B
6%
10%
14%
18%
22%
26%
'14 '15 '16 '17 '18 '19
Direct Vacancy and Availability
Class A Direct Available Class B Direct AvailableClass A Direct Vacancy Class B Direct Vacancy
N E T A B S O R P T I O N & V A C A N C Y
• The Class A property sector continues to lead in the recovery with 277,134 SF of direct space absorbed during the first quarter of 2019, bringing the trailing 12 months total up to just over 1 million SF.
• The largest quarterly gains in the Class A sector included ABS taking possession of their 303K SF building at CityPlace 2, Asurion occupying 130K SF at Legacy at Fallbrook, Lyondell Bassell taking 58K SF at 2 Houston Center, and WeWork occupying 55K at 1725 Hughes Landing.
• The Class A sector also experienced a couple of large vacancies involving KBR giving up 209K SF by exercising a termination option at Eldridge Oaks Phase 1 and Chevron vacating 156K SF at 1600 Smith.
• Class A direct vacancy rates have declined by 30 basis points to 20.0% since hitting a cyclical high during the third quarter of 2018 but remain well above the 5-year average of 16% due to the combination of new construction deliveries, tenant downsizings and sublease space returning to the landlord.
• Although Class A direct availability rates inched higher to 23.5% during the first quarter, they have managed to decline by 60 basis points since hitting their peak during the third quarter of 2018.
• The Class B sector continues to be impacted by the flight to quality with 88K SF of direct space becoming vacant during the quarter and just over 690K SF of occupancy losses over the prior 12 months, causing direct vacancy levels to jump 170 basis points over the prior year.
• The largest vacancies contributing to the negative absorption in the Class B sector involved Ricoh USA giving up 79K SF at Greens Crossing II and AMEC Paragon vacating 57K SF at 10777 Clay Road.
• However, the Class B sector witnessed a couple of large move-ins to help offset the aforementioned losses as Houston Forensic Science Center occupied 86K SF at 500 Jefferson and Percepta moved into 55K SF at 5959 Corporate Drive.
Even though office-using employment growth has strengthened over the past year, Houston’s office leasing market is expected to take some time to recover due to the abundance of sublease and shadow space that will need to be backfilled. Trophy and Class A buildings are expected to lead in the recovery and outperform the broader market as the flight to quality trend persists.
WADE BOWLINPresident, Property ServicesCentral Division
ABSORPTION/VACANCY TRENDS
DIRECT NET ABSORPTION
DIRECT VACANCY AND AVAILABILITY
CLASS A DIRECT NET ABSORPTION
CLASS B DIRECT NET ABSORPTION
DIRECT VACANCY
CLASS A
CLASS A
CLASS B
CLASS B
T-12 MOS
T-12 MOS
1.0 MSF
(690)KSF
20.0%
23.5% 22.3%
29.3M 19.6M
19.6%
DIRECT AVAILABLE
PAGE 5
HOUSTONOFFICE MARKET Q1
2019
R E N T A L R A T E S & L E A S I N G A C T I V I T Y
• Citywide Class A full-service gross asking rents rose by $0.31 to $35.50 per SF during the first quarter and have modestly improved by 1.3% year-over-year, but concessions such as free rent and tenant improvement allowances remain elevated.
• Class B asking rents slightly declined by $0.20 to $21.89 per SF (gross) during the first quarter but have moved up 1.5% or $0.32 over the prior 12 months largely due to newly built and renovated product coming online.
• Sublease inventory declined by 729K to 7.5 million SF during the first quarter and has dropped by 37.9% since its peak of 12.1 million SF in 3Q16. The reduction has resulted from a significant volume of sublease deals inked, spaces returning to the landlord via expirations and some tenants opting to retain their space by withdrawing sublease listings.
• Sublease inventory represents 13.1% of the total space available and accounts for 3.3% of the citywide rentable inventory, with the largest share of sublease availability found in the CBD (23.2%), Katy Freeway/Energy Corridor (17.1%), Westchase (14.0%), Galleria/Uptown (12.9% and Greenway Plaza (12.2%) submarkets.
• Leasing activity has picked up over the past year with approximately 52% of the leasing volume above the 25K SF threshold involving new deals, while the remaining share of the leasing activity has come from lease renewals (36%), subleases (9%) and expansions (3%).
• Leasing activity over the prior 12 months has been primarily concentrated in the CBD (4.1M SF), Katy Freeway/Energy Corridor (2.1 M SF), and The Woodlands (1.1M SF), which have collectively accounted for 7.4M SF or 75% of the market’s leasing volume involving deals above the 25K SF threshold.
-2%
0%
2%
4%
6%
8%
'14 '15 '16 '17 '18 '19
Rental Rates Year-over-Year % Change (FS Gross)
Class A Class B
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
'14 '15 '16 '17 '18 '19
In T
hous
ands
of S
F
Direct Leasing ActivityRolling 12-Months
Class A Class B
After rising steadily over the past few years, concessions to tenants have begun to plateau but remain at elevated levels due to the many space options available. These aggressive concession packages include significant free rent periods, abated or discounted parking, higher improvement allowances and a commitment to provide enhanced building amenities.
JOHN SPAFFORDExecutive Vice President, Director of LeasingCentral Division
RENTS/LEASING ACTIVITY
RENTAL RATESY-O-Y % change, FS GRS
TOTAL LEASING ACTIVITYRolling 12-Months
RENT GROWTH (Y-O-Y)
SUBLEASE AVAILABILITY
DIRECT LEASING ACTIVITY
1.0%
7.5 MSF
19.3 MSF
37.9%
SINCE PEAK
15.8%
ABOVE 5-YR. AVG.
T-12 MOS
PAGE 6
HOUSTONOFFICE MARKETQ1
2019
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
'14 '15 '16 '17 '18 '19
In T
hous
ands
of S
F
Construction Pipeline
Under Construction Delivered
Updated 4/5/19
SIGNIFICANT PROJECTS UNDER CONSTRUCTION
PROJECT NAME SIZE (SF) SUBMARKET MAJOR TENANT(S)% PRE-LEASED DEVELOPER
TARGET COMPLETION
Texas Tower 1,106,581 CBD Vinson & Elkins; Hines 33% Hines 4Q 2021Capitol Tower 780,593 CBD B of A; Waste Mgmt; Winston & Strawn 81% Skanska 2Q 2019 Park Place | River Oaks 207,202 Galleria / Uptown N/A 0% Stonelake Capital Partners 2Q 2020Chasewood Crossing Three 156,000 FM 1960 N/A 0% Greenwood Properties 4Q 2019CityPlace 1 149,500 Woodlands N/A 18% Patrinely Group 2Q 2019 The Cannon 120,000 Katy Freeway The Cannon (co-working) 100% United Constrctors of Texas 2Q 2019Hedwig Place 102,474 Katy Freeway Memorial Plastic Surgery; Texas ENT 61% Stream / AMD Global 2Q 2019Discovery Bay Medical Plaza 100,838 S. Main / Med Cntr N/A 0% Stream Realty Partners 3Q 2020M.K.T. 100,000 Northwest N/A 9% Triten Real Estate Partners 1Q 2020Note: * Build-to-suit; Corporate owned office buildings (excluded from competitive statistics & above table)
C O N S T R U C T I O N
• The office development pipeline totals nearly 3.1 million SF underway, with 41.6% of this space already preleased. The largest concentration of development activity is found in the CBD with 1.9M SF underway, which accounts for 61% of the market-wide construction.
• During the first quarter, developers completed only two office buildings totaling 69K SF, but there’s an additional 1.5 million SF slated to deliver by year-end 2019 with 58% of the space already pre-leased.
• Since hitting a cyclical low early in 2018, office construction levels have increased by nearly 1.2 million SF as developers have broken ground on several office projects totaling just over 2 million SF over the prior 12 months.
• The largest construction project breaking ground during the quarter involved Park Place | River Oaks, a 207K SF Class A office tower near the River Oaks District. Stonelake Capital commenced construction on a speculative basis, with expected delivery early in 2020.
• The largest office construction project underway includes a 47-story, 1.1 million SF office tower being developed by Hines, which is slated to deliver in late 2021. Texas Tower is currently 33% leased with recent deals inked by law firm Vinson & Elkins (212K SF) and Hines (155K SF).
• Skanska’s Capitol Tower is nearing completion with delivery scheduled by mid-year 2019. The 778K SF office tower is already 80% pre-leased with recent deals by Waste Management (284K SF) and Winston & Strawn (63K SF) to accompany Bank of America (210K SF) and Quantum Energy Partners (32K SF).
• Although office construction activity has tapered off dramatically after delivering over 24 million SF of competitive space over the past six years, new construction will remain a valid alternative for tenants willing to pay a premium for high quality office buildings that offer the latest workplace trends as they seek to retain and attract the most skilled employees.
• New developments expected to break ground in the near future include Hewlett Packard Enterprises’ 568K SF campus in Springwoods Village, Marathon Oil’s 600K SF office tower to be built on a 3-acre site in CityCentre, and Fluor Corp’s multi-building campus on 50 acres previously purchased in Telfair close to its current facilities.
CONSTRUCTION
CONSTRUCTION PIPELINE
SIGNIFICANT PROJECTS UNDER CONSTRUCTION
3.1 MSF
2.0 MSF
1.6 MSF
OFFICE SPACE UNDER CONSTRUCTION41.6% PRE-LEASED
NEW OFFICE BREAKING GROUNDT-12 MOS
FORECASTED SUPPLY IN2019
PAGE 7
HOUSTONOFFICE MARKET Q1
2019
S U B M A R K E T S T A T I S T I C S
DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT
SubmarketTotal Inventory
SF Direct Sublease Direct
Availability Direct Vacancy Current Qtr.Trailing
12 mos.Completions Current Qtr
Under Construction Class A Class B
Central Business District 38,967,038 9,466,715 1,748,580 24.3% 17.5% 78,539 -25,522 0 1,887,174 $44.16 $30.82
Galleria / Uptown 23,886,721 4,744,693 974,379 19.9% 16.3% -27,096 143,546 0 207,202 $37.77 $27.43
Greenway Plaza 10,808,104 1,654,291 923,308 15.3% 15.8% 33,337 25,629 0 0 $38.84 $27.79
Katy Freeway 30,942,868 7,015,827 1,290,524 22.7% 21.4% -304,667 267,972 0 222,474 $36.72 $22.51
Westchase 15,583,289 4,678,936 1,054,570 30.0% 22.8% -8,246 -407,914 0 0 $33.93 $21.80
North Houston / IAH / N Belt 12,673,097 5,799,305 55,569 45.8% 43.5% -31,449 -519,254 0 0 $21.92 $15.27
Northwest Freeway / N Loop West 8,925,525 2,145,712 5,908 24.0% 22.3% -74,514 -171,112 0 120,000 $23.65 $20.24
NASA / Clear Lake & SE Outlier 6,744,967 1,412,045 8,541 20.9% 20.0% -24,134 -95,271 0 51,614 $28.81 $20.49
Fort Bend / Sugar Land / SW Outlier 7,502,186 921,591 260,966 12.3% 12.3% -8,288 69,727 38,599 54,000 $32.03 $25.86
Richmond / Fountainview 1,290,299 129,605 0 10.0% 8.6% -6,749 -2,694 0 0 - $17.48
San Felipe / Voss 5,237,885 1,162,020 86,648 22.2% 19.7% -4,868 -45,940 0 0 $36.89 $24.64
Bellaire 3,403,544 721,788 33,417 21.2% 20.2% 819 9,071 0 0 $28.94 $23.66
Midtown / Allen Parkway 5,901,561 1,065,314 27,166 18.1% 13.0% -27,261 -48,023 0 35,363 $32.67 $26.11
FM 1960 9,393,009 2,014,830 117,394 21.5% 17.7% 43,771 36,747 30,000 156,000 $27.29 $17.71
Kingwood / Humble / NE Outlier 1,457,163 203,060 4,339 13.9% 14.4% 25,081 31,951 0 0 $25.71 $21.53
Southwest Beltway 8 / SW / Hillcroft 9,850,161 2,376,342 78,040 24.1% 21.2% 42,137 75,812 0 0 $17.82 $16.39
S. Main / Medical Center / South 9,108,391 826,968 25,710 9.1% 8.2% -29,016 -24,009 0 100,838 $32.46 $24.56
The Woodlands / Conroe 12,724,766 1,688,022 463,072 13.3% 13.2% 398,540 785,237 0 256,340 $33.39 $25.80
Gulf Freeway / Pasadena 3,526,591 546,155 2,398 15.5% 14.2% -7,251 60,323 0 0 - $23.24
Baytown / I-10 East 1,148,961 226,904 0 19.7% 8.2% 6,047 53,157 0 0 - $16.64
Katy / Grand Parkway West 2,739,798 437,606 85,134 16.0% 14.1% 59,194 139,128 0 0 $28.43 $28.27
West Belt 5,017,068 1,352,651 304,262 27.0% 21.8% 51,364 -88,455 0 0 $28.68 $22.15
Totals 226,832,992 50,590,380 7,549,925 22.3% 19.2% 185,290 270,106 68,599 3,091,005 $35.50 $21.89
DIRECT NET ABSORPTION CONSTRUCTION ASKING RENT
Property TypeTotal Inventory
SF Direct Sublease Direct
Availability Direct Vacancy Current Qtr. Year To DateCompletions Current Qtr
Under Construction Asking Rent
Y-O-Y % Change
Class A 124,816,444 29,331,280 6,433,371 23.5% 20.0% 277,134 1,003,440 0 2,839,005 $35.50 1.3%
Class B 87,635,715 19,609,798 1,041,650 22.4% 19.6% -87,942 -690,853 68,599 252,000 $21.89 1.5%
Class C 14,380,833 1,649,302 74,904 11.5% 9.2% -3,902 -42,481 0 0 $17.29 0.3%
Totals 226,832,992 50,590,380 7,549,925 22.3% 19.2% 185,290 270,106 68,599 3,091,005 $29.52 1.2%
TOTAL SPACE AVAILABLE
TOTAL SPACE AVAILABLE
DIRECT AVAILABLE / VACANT
DIRECT AVAILABLE / VACANT
Please note: 800 Bell, the former Exxon headquarters building in the Houston CBD, is excluded from competitive office inventory statistics since Shorenstein Properties’ plans to redevelop the 1.3 million sq. ft. Class B office building has been placed on hold.
SIGNIFICANT LEASE TRANSACTIONS | Q1 2019Significant Lease TransactionsTenant SF Type Building Class SubmarketUniversalPegasus International (UPI) 113,114 Renewal Loop Central II A BellaireForum Energy Technologies 108,639 Renewal Sam Houston Crossing II A West BeltDirect Energy LP 105,578 New 2 Houston Center A CBDCAM Integrated Solutions 59,220 New 17000 Katy Fwy A Katy FreewayLyondell Basell 58,343 New 2 Houston Center A CBDEnVen Energy Corporation 57,139 New 609 Main at Texas A CBDCB&I / McDermott 53,245 Sublet Pinnacle Westchase A WestchaseCallon Petroleum Company 50,462 Sublet One BriarLake Plaza A WestchaseMagnolia Oil & Gas 47,564 Sublet Nine Greenway Plaza A Greenway PlazaGensler 44,477 New 2 Houston Center A CBD
ABOUT MADISON MARQUETTE
Madison Marquette is a leading private real estate investment manager, developer, operator and service provider
headquartered in Washington, D.C. Founded in 1992, the company’s reputation is built on the successful
development, repositioning and redevelopment of landmark mixed-use assets in major and emerging high-growth
markets throughout the United States. Madison Marquette partners with global, institutional and private investors to
achieve industry-leading investment performance across asset classes -- including mixed-use, retail, office, medical,
industrial, senior living and multi-family. As a full-service real estate provider, the company delivers integrated
leasing and management services to a diverse portfolio of 330 assets in 24 states and manages an investment
portfolio valued at over $6 billion. Madison Marquette has over 600 professionals providing nationwide service from
13 regional markets and is a member of the Capital Guidance group of companies.
JOHN SPAFFORDExecutive Vice President,
Director of Leasing713.209.5823
BRAD SINCLAIRExecutive Vice President,
Leasing713.209.5965
DOUG BERRYVice President,
Creative Director713.209.5897
MICHAEL SIEGERSenior Vice President,
Leasing713.209.5930
AMANDA APPVice President,
Leasing713.209.5724
KIM GRIZZLE-SHAPIROSenior Vice President,
Leasing713.209.5940
COURTNEY BUCKOUTLeasing
Manager713.209.5959
MARCI PHILLIPSSenior Vice President,
Leasing281.444.6434
MIKE MARTINSenior Vice President,
Leasing713.209.5710
ANGELINA STONELeasing
Manager713.209.5737
BLAINE SINCLAIRLeasing
Manager713.209.5794
LIVY WHITELeasing
Manager713.209.5979
MADELINE GREGORYLeasing
Manager713.209.5734
ARIEL GUERREROSenior Vice President,Director of Research
WADE BOWLINPresident, Property Services
Central Division713.209.5753
JAMES DECMANResearch Manager
HOUSTONOFFICE MARKET Q1
2019
