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“Industries that are still doing quite well in Houston, such ashealthcare, technology and downstream energy, are capitalizing on a growing field of space options.”
Tim Wingfield,Savills Studley Research
Savills Studley Report Houston office sector Q4 2015
Savills Studley Research Houston
SUMMARYMarket Highlights
OVERALL RENT CONTINUES DECLINE
Overall asking rent, $28.99, recorded a second consecutive quarter of decline, falling by 1.6%. Class A asking rent, $34.70, posted a similar decrease of 2.5%.
ADDITIONAL INCREASES IN AVAILABILITY RATES
The overall availability rate, 23.2%, increased by 0.8 pp from last quarter and by 5.4 pp from last year. The Class A rate jumped by 0.8 pp quarter-on-quarter and by 6.5 pp year-on-year to 23.8%.
QUARTERLY LEASING REMAINS FLAT
Fourth quarter leasing totaled 2.3 msf, similar to its level during the prior three quarters. Tenants leased 8.4 msf in 2015, a dramatic plunge from the 14.5 msf leased in 2014 and the weakest annual volume since 2009.
02
Savills Studley Report | Houston
Availability Rises as Tenants Remain Cautious
While most major office markets in the U.S. are seeing payroll growth and rising demand for office space, Houston continues to head in the opposite direction. The office space market was far from being in a free fall, but leasing activity was listless and availability rose for the fourth consecutive quarter. Little change is expected in 2016, but many anticipate signs of stabilization both in energy markets and Houston's office sector by 2017. Net absorption for 2015 was 1.4 msf in negative territory, representing the biggest decrease in occupancy for the region since 2009, when occupancy fell by 2.0 msf. This past year’s negative absorption was a reversal from the positive 3.8 msf in net absorption during 2014, and ended a string of five years of net positive absorption that started in 2010.
Weakest Activity since 2009
Demand for office space showed no signs of improvement. During 2014, tenants leased 14.5 msf while activity in 2015 plummeted to 8.4 msf, rivaling the market nadir of 7.0 msf in 2009. Fourth quarter deal volume ticked up slightly, to 2.3 msf, but much of that was driven by a few large, bearish moves. The energy sector is simply too uncertain about where pricing and headcounts will be in a year or two to make long-term commitments. Apache Corporation, for example, extended its 524,000-sf lease in Post Oak Central for just one year, pushing back its expiration from December 2018 to December 2019. It executed this extension instead of moving forward on a new development with 6.4 acres of land that it purchased in BLVD Place in 2012. The quarter’s second largest lease, finalized by Bracewell & Giuliani at Pennzoil Place, was a renewal that saw the law firm downsize by an entire floor to 189,061 sf.
The correction in oil and gas pricing appears to be here to stay for a while, setting the stage for more merger and acquisition activity next year. Oil producers have already done a lot to streamline costs and eliminate redundant and costlier operations. Unfortunately, the debt loads of some energy companies could spur a few Chapter 11 filings next year. Merger and acquisition activity, as well as bankruptcy filings, will contribute to additional negative absorption.
Rents Adjusting, but Still a Bit StickyLandlords are feeling the marked reduction in tours, requests for proposals and ultimately deal volume. Many companies are
Source: Bureau of Labor Statistics
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70Millions
Hou. Off. Emp. Hou - % Ann. Ch. Off. Emp. U.S. - % Ann. Ch. Off. Emp
Office-Using Employment Trends
$34.70
$28.44
$21.75$18.43
$0
$5
$10
$15
$20
$25
$30
$35
$40
2015 4Q 2014 4Q 2013 4Q 2012 4Q 2011 4Q2010 4Q
($/sf) Rental Rate Trends
Class A Class B & C
Asking Rent Trends
23.8%
18.5%
22.5%19.9%
0%
5%
10%
15%
20%
25%
30%
2015 4Q 2014 4Q 2013 4Q 2012 4Q 2011 4Q2010 4Q
(%) Availability Rate Trends
Class A Class B & C
Availability Rate Trends
savills-studley.com/research 03
Q4 2015
Tenant Sq Feet Address Market AreaApache Corporation 524,000 1990 & 2000 Post Oak Blvd West Loop / GalleriaBracewell & Giuliani 189,061 711 Louisiana St CBDSt. Luke's Episcopal Health System 139,424 3100 Main St MidtownBASF 106,555 11750 Katy Fwy Katy FreewayWyle Laboratories 78,751 2400 NASA Pky NASA / Clear LakeKirkland & Ellis 62,000 609 Main St CBDG&A Partners 30,065 17220 Katy Fwy Katy FreewayBEI Engineers 26,330 12301 Kurland Dr Pasadena / BaytownSkadden Arps Slate Meagher & Flom 26,091 1000 Louisiana St CBDSK Innovations 23,608 11700 Katy Fwy Katy FreewaySum of Top 10 Leases 1,205,885 Sum of 4th Qtr Leasing Activity 2.3 MSF
holding off on making space-use decisions due to uncertainty. Other tenants are delaying in anticipation of additional rental rate correction in coming quarters. Rents appear to be adjusting in spots, but the gap between tenant and landlord expectations has widened. Many landlords still want to hit or come close to their pro forma financials. In contrast, some area businesses expect rents to adjust on a level that matches the sharp slide in energy pricing.
Other costs are likely to abate a bit in the coming year. Property taxes could fall slightly, reversing five consecutive years of growth, and tenants should eventually see a moderation in costs passed through to them. So far there has not been any marketwide growth in concessions, but as more space hits the market tenants can anticipate some very aggressive packages to develop.
Sublet Supply Surging
Sublet supply continues to mount and will be the most likely avenue for sharper rental rate erosion in future quarters. Significant amounts of sublease space continue to sit on the market. Houston had 7.6 msf of sublease available at year's end, about even with the remaining unleased available space under construction. Sublet supply has spiked by 68.0% from the 4.5 msf available at the end of 2014. New sublease blocks are expected to hit the market in 2016, particularly in the CBD. Shell is projected to vacate 250,000 sf in One Shell Plaza and EP Energy, likewise, is anticipated to leave 100,000 sf in the Kinder Morgan Building. Shell would likely also shed space at BG Group Place should its pending $70-billion acquisition of BG Group clear governmental hurdles and finalize.
Many large tenants who paid at the very top of the market in the last few years warehoused space in anticipation of continued headcount growth. As a result, many firms had surplus space even prior to the implementation of layoffs in the last year. In 2016, the office market should see more shadow space listings as some tenants struggle to rationalize their balance sheets during the energy downturn.
Opportunities Opening Up
Tenants with current or imminent lease rollovers are already capitalizing on opportunities. Industries that are still thriving in this economy, such as health care, technology, downstream energy and petrochemical, can combine the confidence
in their business with the soft office market to aggressively enter into a tenant-favorable lease. Jones & Carter recently took 47,482 sf at 6330 West Loop South in Bellaire. The Class B building was occupied by WorleyParsons prior to its relocation to west Houston. Size is not a restriction, as there is now an abundance of direct and sublease spaces with all sizes of contiguous blocks available.
Fortunately for the market, the peak of the development pipeline (2013 and 2014) coincided with a period of strength in the broader economy and energy markets as well. As a result, more than two-thirds of that 17.0 msf cycle was pre-leased by the end of 2015. Nevertheless, there are several notable mistimed projects that will be under immense pressure to fill current availabilities. In December 2016, 609 Main is set to deliver, and while Kirkland & Ellis executed the property’s first lease in the fourth quarter (62,000 sf), Hines still has nearly 1.0 msf left to lease in less than 12 months. Only time
will tell whether that space continues to remain vacant after delivery or if the landlord successfully cannibalizes other CBD Class A buildings through new relocation deals. Unlike Energy Centers Three and Four, Trammell Crow Company’s Energy Center Five remains completely unleased with 524,328 sf available. Energy Center Five is set to deliver April 2016.
Looking Forward
In the most optimistic scenario, 2016 will bring further correction, followed by gradual improvement in 2017 as energy prices stabilize and oil and gas companies complete their adjustment. With annual global demand estimated to increase by 1.6 million bbl/d by the end of 2016, equilibrium in the oil market may be on the horizon after a year’s time, assuming that the U.S. economy avoids other downward macroeconomic trends.
Availability Rate Comparison Rental Rate Comparison
Major Transactions
$37.61$33.75$33.29$32.99$32.37$32.10
$31.23$30.74
$28.99$26.43
$23.85$22.89$22.67$22.05
$21.36$19.56$19.33
$17.05$15.82
$34.98$28.09
$26.58
$0 $5 $10 $15 $20 $25 $30 $35 $40
CBDGreenway PlazaW Loop/Galleria
MidtownUS Index
Katy FreewayWoodlandsWestchase
Houston RegionMedical Center/S
BellaireNorth Belt/Greenspoint
N LoopW/290 NrPasadena/BaytownNorthwest/290 FarNASA/Clear Lake
SW/SugarlandI-10/NE/Kingwd
FM 1960
NewExisting Direct
Sublet
($/sf)
Type
13.2%
13.4%
13.4%
16.5%
16.9%
17.0%
18.1%
18.3%
18.7%
19.1%
21.0%
22.6%
23.2%
24.6%
28.0%
28.6%
29.8%
29.9%
10% 15% 20% 25% 30%
Bellaire
Pasadena/Baytown
I-10/NE/Kingwd
Midtown
Greenway Plaza
US Index
N LoopW/290 Nr
W Loop/Galleria
SW/Sugarland
CBD
Medical Center/S
Westchase
Houston Region
FM 1960
Northwest/290 Far
Woodlands
NASA/Clear Lake
Katy Freeway
(%)
Savills Studley Report | Houston
04 @SavillsStudleywww.savills-studley.com
Please contact us for further information
(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.
The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2016 Savills Studley
Savills Studley333 Clay Street, Suite 3700 Houston, TX 77002(713) 522-5300
Co-Branch ManagersMark W. O'Donnell - EVP, [email protected]. Derrell Curry - EVP, [email protected]. Mark Russell - EVP, [email protected] R. Biegel - EVP, [email protected]
290
288
95
95
17
17
710
6
53
14
13
12
2
15
4
1
8
9
16
11
8
Map Submarket Total
SF(1000's)
Last 12 Months
ThisQuarter
%Change
fromLast Qtr.
YearAgo
ThisQuarter
ppChange
fromLast Qtr. (1)
YearAgo
ThisQuarter
%Change
fromLast Qtr.
YearAgo
Bellaire 3,048 81 401 2.1% 564 13.2% 0.3% 18.5% $23.85 -0.9% $20.61Bellaire - Class A 1,090 46 163 -0.3% 161 14.9% -0.1% 14.8% $24.86 0.7% $23.85Central Business District 38,563 808 7,385 5.1% 5,322 19.1% 0.9% 14.2% $37.61 -2.5% $38.03Central Business District - Class A 27,379 637 4,332 8.4% 3,704 15.8% 1.2% 14.0% $41.18 -3.1% $42.22FM 1960 2,757 159 678 -1.1% 739 24.6% -0.3% 26.8% $15.82 0.6% $14.50FM 1960 - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AGreenway Plaza 10,006 1,041 1,691 -3.0% 1,453 16.9% -0.5% 14.4% $33.75 -1.8% $33.58Greenway Plaza - Class A 6,922 847 1,230 -4.6% 972 17.8% -0.9% 13.8% $37.97 -1.4% $39.49I-10/NE/Kingwood 1,286 19 172 11.7% 170 13.4% 1.4% 13.2% $17.05 -3.2% $17.93I-10/Northeast/Kingwood - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AKaty Freeway 25,865 1,522 7,728 -0.7% 4,375 29.9% -0.2% 18.4% $32.10 -1.5% $32.05Katy Freeway - Class A 16,715 922 5,393 -0.9% 2,808 32.3% -0.3% 18.4% $35.93 -1.1% $36.76Medical Center/South 2,344 189 493 -5.5% 224 21.0% -1.2% 9.5% $26.43 1.2% $18.64Medical Center/South - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/AMidtown 4,840 258 800 -13.3% 808 16.5% -2.5% 16.7% $32.99 -2.3% $31.81Midtown - Class A 1,371 45 257 -4.1% 309 18.7% -0.8% 22.6% $41.56 -1.2% $41.36North Belt/Greenspoint 11,254 391 5,222 11.4% 4,053 46.4% 4.8% 37.4% $22.89 2.8% $22.69North Belt/Greenspoint - Class A 4,569 0 2,625 2.8% 2,247 57.5% 1.5% 51.4% $26.62 0.4% $28.76NASA/Clear Lake 5,051 144 1,504 4.6% 974 29.8% 1.3% 19.9% $19.56 0.0% $19.06NASA/Clear Lake - Class A 1,228 0 96 -16.2% 92 7.8% -1.5% 7.5% $28.10 2.0% $24.80North Loop W/290 Near 5,186 225 941 1.7% 1,085 18.1% 0.3% 20.9% $22.67 1.0% $23.19North Loop W/290 Near - Class A 1,006 0 407 5.6% 344 40.5% 2.1% 34.2% $26.06 0.2% $26.77Northwest/290 Far 11,242 359 3,146 2.4% 2,489 28.0% 0.7% 22.9% $21.36 -2.8% $24.91Northwest/290 Far - Class A 6,314 248 1,729 -5.6% 1,488 27.4% -1.6% 27.7% $23.86 -3.9% $28.66Pasadena/Baytown 2,342 120 313 0.2% 282 13.4% 0.0% 12.0% $22.05 2.0% $20.83Pasadena/Baytown - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
$20 71Southwest/Sugarland 14,434 502 2,700 1.7% 3,079 18.7% 0.3% 21.4% $19.33 -0.3% $19.41Southwest/Sugarland - Class A 4,941 201 754 3.3% 657 15.3% 0.5% 13.3% $24.42 -0.9% $23.87West Loop/Galleria 29,451 1,769 5,382 1.4% 4,601 18.3% 0.2% 15.7% $33.29 -0.3% $32.42West Loop/Galleria - Class A 17,539 1,132 3,407 4.9% 2,731 19.4% 0.9% 15.7% $37.54 -1.7% $37.09Westchase 14,905 615 3,363 5.5% 1,988 22.6% 1.2% 14.0% $30.74 -7.2% $28.60Westchase - Class A 8,526 191 2,382 6.9% 947 27.9% 1.8% 12.1% $34.60 -11.0% $37.70Woodlands 8,441 207 2,410 16.9% 762 28.6% 4.1% 10.5% $31.23 -3.3% $34.05Woodlands - Class A 4,940 134 1,665 24.6% 391 33.7% 6.7% 9.6% $33.96 -5.3% $38.35Greater Houston Total 190,776 8,402 44,329 3.4% 32,967 23.2% 0.8% 17.8% $28.99 -1.6% $28.48Greater Houston Total - Class A 102,815 4,404 24,518 3.6% 16,910 23.8% 0.8% 17.3% $34.70 -2.5% $35.50
1
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AvailableSF
AvailabilityRate
Asking Rents Per SF
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3
4
7
8
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