Office And Industrial Leasing Activity On the Rise in Houston’s Booming Economy

Houston Office Market

Houston’s growing economy continued to boost the commercial real estate market with positive absorption and numerous projects under construction in both the office and industrial markets during the first three months of 2013, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®.

The city’s office market finished the first quarter with a total of 511,161 square feet of positive net absorption, which marks the eighth consecutive quarter of positive absorption. Class A space is on top for 326,441 square feet absorbed, trailed closely by Class B with 236,927 square feet. Class C recorded a negative 52,207 square feet, continuing its second quarter of negative absorption.

Three suburban submarkets recorded positive net absorption of more than 100,000 square feet during the first quarter with the West submarket at 145,733 square feet taking the lead. Uptown recorded 121,749 square feet while the Energy Corridor completed the top three with 104,462 square feet. The three submarkets account for 72.8% of the total absorption for the year. The Central Business District (CBD) submarket recorded a negative 94,995 square feet of net absorption. No major new office buildings have been completed yet in 2013, although five buildings totaling 947,080 square foot are scheduled for completion during the second quarter; all but one is 66% or more pre-leased.

The Houston area’s strong job growth, including commercial construction, continues to positively impact the area’s office leasing activity and new projects. Currently, 30 office properties totaling 52 buildings and almost 9.6 million square feet are under construction, with Exxon Mobil’s estimated 3 million square feet and 22 buildings topping the list for overall size. Energy Tower III at 11740 Katy Freeway, one of the largest spec buildings at 450,532 square feet, is the latest major project to announce 100% pre-leasing to Technip USA Inc. Two BriarLake Plaza is the largest multi-tenant building at 331,689 square feet to start construction during the first quarter; however, it is 52% leased to Samsung Engineering.

The West area, including the Energy Corridor, boasts 11 projects totaling 3.2 million square feet under construction, while The Woodlands submarket currently has seven buildings totaling 1.4 million square feet. Several other projects, primarily in the submarkets to the west and north, have been announced since the first of the year and are scheduled to break ground later this year.

The current 11.4% vacancy rate is an improvement over the 12.4% vacancy recorded during the same quarter a year ago. Leasing activity has slowed but remains strong as many firms are negotiating expansion along with renewals but are not finding the larger blocks of space, especially Class A space, required.

Averaged weighted rental rates have inched up 4.0% during the first quarter to stabilize at $23.21 per square foot. As supply tightens, better properties in the stronger submarkets are already showing minimum $1 per square foot increases along with fewer concessions; however, some lesser quality properties have actually lowered their rates to attract tenants.

Overall sublease space increased slightly to 1.7 million square feet this quarter compared to 1.6 million square feet last quarter. Chevron has leased more than 300,000 square feet of Devon’s former space in Allen Center, but that space was not technically available until January 1 so it never registered in the numbers.

Houston Industrial Market

Houston’s industrial market continues to improve with strong positive net absorption, according to statistics released by Commercial Gateway. With a 13th consecutive quarter of positive absorption — the prior six each recording more than 1.3 million square feet — the industrial market appears to have stabilized, waiting for the next wave of new product to enter the market. Vacancy overall is up slightly from last quarter to 7.1%, compared to 7.4% a year ago. Manufacturing space has the lowest vacancy of 4.9%. More than 1.3 million square feet in 15 properties came online during the first quarter, entering the market collectively at an 81.4% vacancy rate.

Net absorption in the first quarter totaled 1.1 million square feet, which is slightly less than the 1.4 million square feet recorded during the same quarter last year. Warehouse/ distribution properties recorded slightly more than 1.0 million square feet of absorption this quarter, continuing a six-year trend of positive absorption and accounting for 90.1% of all absorption. Properties classified as warehouse/distribution represent about 72.7% of the total market. Contributing to the absorption and leasing total is Schenker’s 267,201-square-foot lease at 10650 Okanella and Crane Worldwide’s 150,000-square-foot lease at 6501 Navigation. The largest industrial lease to-date is Exel’s renewal of more than 767,000 square feet in four buildings at 8607-8833 City Park Loop.

Rental rates have increased marginally during the last four quarters, with this quarter’s quoted, weighted averaged annual rental rate of $5.76 per square foot 2.3% higher than the $5.63 rate recorded a year ago. Rental rates will continue to inch upward as long as supply remains limited. Sublease space has not fluctuated much during the last two years; 1.7 million square feet was reported in the fourth quarter, which represents a 208,000-square-foot drop from the same quarter a year ago.

Construction activity is still brisk, with warehouse/distribution projects accounting for almost 4.1 million square feet, or 90.1%, of the buildings under construction. Currently, 55 buildings in 39 projects totaling about 4.6 million square feet are under construction, with the two largest being Ben Keith’s distribution center at 475,000 square feet and Medline’s new building at 506,200 square feet. The under-construction properties are about 25% pre-leased. Crane-ready buildings are still in short supply, with only four projects totaling 105,286 square feet classified as manufacturing. Of the overall total, 18 projects are scheduled to be completed during the second quarter of 2013. About 50 projects totaling 2.7 million square feet were completed in 2012.

Two of the largest multi-tenant and multi-building business parks underway during the first quarter include Transwestern’s five buildings at Mason Creek Business Park totaling 384,900 square feet and Carson Companies’ three buildings at Commerce Center totaling 365,462 square feet; Carson Companies also started a speculative 365,727-square-foot building in Bayport North.

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