Houston’s commercial real estate market continues to achieve record levels of leasing and construction activity as major energy-related companies sign up for large spaces in proposed and under-construction projects, according to quarterly market research compiled by Commercial Gateway, the commercial division of the Houston Association of REALTORS®
Houston Office Market
In the suburban market, Conoco Phillips signed for 850,000 square feet in Energy III and IV, Technip took all 430,000 square feet in Energy Center III, and Swift Energy 
reportedly signed for the 235,000 square feet in proposed Five Chasewood Park. Other energy-related firms, such as Southwestern Energy and Chevron, opted for owner-occupied properties. Southwestern broke ground on its 515,000-square-foot headquarters in North Houston, while officials with Chevron announced its plans for a new 1.7 million square-foot building at 1600 Louisiana in the Central Business District (CBD). Plans for the new building will be finalized in 2014, with occupancy scheduled for late 2016. Chevron will add the third tower adjacent to its current buildings at 1400 Smith and 1500 Louisiana, creating a downtown campus complete with employee amenities such as dining, fitness, training and conference facilities. These new announcements follow the first quarter’s news of BHP Billiton’s new 560,000-square-foot headquarters building in Uptown and Phillip 66’s multiple-building campus of 1.1 million in Westchase, among others.
Current office construction has reached an all-time high of 10.5 million square feet, representing 36 projects and 57 buildings. ExxonMobil’s estimated 3 million square feet and 22 buildings top the list for overall size. Multi-tenant buildings under construction are currently reporting an average 70% preleased, and 20 buildings representing 3.5 million square feet are scheduled to be completed during the second half of the year in several submarkets.
The majority of construction is occurring in the north and west areas, with The Woodlands submarket boasting 13 projects totaling 5.5 million square feet under construction, while the West area, including the Energy Corridor submarket, has 11 projects totaling 3.3 million square feet under construction. Several other projects, primarily in the submarkets to the west and north, including Westchase, are in the planning stages and are scheduled to break ground later this year.
Although large leases continue to be announced, overall leasing activity in existing spaces has slowed as small- to medium-sized tenants determine their best options. The city’s office market finished the second quarter with a total of 528,962 square feet of positive net absorption, which marks the ninth consecutive quarter of positive absorption. The total absorbed this quarter compares to about half the absorption recorded in the second quarter a year ago. Class A space represents the majority of space absorbed, 773,048 square feet, and accounts for tenants moving into spaces leased late last year or earlier this year. Both Class B and Class C recorded negative absorption, with Class C showing negative activity for the third consecutive quarter.
Only one submarket, the Northwest, recorded positive net absorption of more than 100,000 square feet during the second quarter, primarily due to the absorption upon completion of one building, Sam Houston Crossing Two. Uptown recorded an absorption total of 90,003 square feet, also in part due to the new BBVA Compass building coming online with occupied space. Both new buildings were 70% preleased. CityCentre IV is the only other multi-tenant building to come online during the second quarter at 91% preleased.
The CBD submarket recorded positive absorption of 127,906 square feet for the quarter but a total negative 64,075 square feet of net absorption for the first half of the year. Class A space absorbed resulted from deals completed previously with move-ins this quarter. No major new office buildings have broken ground in the CBD this year, but several announcements from developers, including Hines and Skanska, are on the horizon.
The current 11.2% vacancy rate is an improvement from the 12.1% 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 increased 2.5% during the first quarter compared to a year ago to stabilize at $23.21 per square foot. Class A rates have seen the largest increases as supply tightens. Operating expenses will also be rising as property values continue their upward trend, and the increased taxes will be passed on to tenants.
Overall sublease space increased to 2.0 million square feet this quarter compared to 1.7 million square feet last quarter. Sublease space has seen gradual increases over the last year as tenants opt to pay more and move into brand new office space.
Houston Industrial Market
Houston’s industrial market continues to improve with strong positive net absorption, according to statistics released by Commercial Gateway. With a 14th consecutive 
quarter of positive absorption – with the last eight quarters averaging 1.5 million square feet each – the industrial market appears to have stabilized, waiting for the next wave of new product to enter the market. Vacancy overall is down slightly from last quarter to 6.9%, compared to 7.5% a year ago. Manufacturing space has the lowest vacancy of 5.4%. More than 1.2 million square feet in 17 properties came online during the first quarter, entering the market collectively at 74.5% preleased.
Net absorption in the first quarter totaled 1.375 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 the lion’s share, with almost 1.7 million square feet of absorption this quarter, continuing a six-year trend of positive absorption and accounting for almost 2.5 million square feet of absorption for the first half of the year. Properties classified as warehouse/distribution represent about 72.7% of the total market. Leasing activity this quarter included Favorite Brand’s 91,000-square-foot lease at 9010 W. Little York, Primesource’s 150,000-square-foot lease for a new Century Plaza building, and Deep Down’s commitment of 215,000 square feet at 18511 Beaumont Highway.
Rental rates have increased 9.5% during the last four quarters, based on this quarter’s quoted, weighted averaged annual rental rate of $6.13 per square foot compared to the $5.60 rate recorded a year ago. Rental rates will continue to inch upward as long as supply remains limited. Sublease space increased this quarter to almost 2.2 million square feet after four previous quarters of 1.7 million square feet.
Construction activity is still brisk, with warehouse/distribution projects accounting for almost 6.2 million square feet, or 90%, of the buildings under construction. Currently, 66 buildings in 53 projects totaling about 6.8 million square feet are under construction, with the two largest being Imperial Distribution Park at 611,000 square feet and Medline’s new building at 506,200 square feet. Crane-ready buildings are still in short supply, with only four projects totaling 105,286 square feet classified as manufacturing.
Of the overall total, 40 projects are scheduled to be completed during the last half of 2013. About 35 projects totaling 2.6 million square feet have been completed this year, compared to 50 projects totaling 2.7 million square feet completed in 2012. Ben E. Keith’s 475,000-square-foot building in the Southwest is the largest completed to date; employees will continue moving into the space during the third quarter.
The majority of industrial construction is occurring in the Northeast, Northwest and West segments centered along Interstate 10 and along the Beltway. Several of the largest multi-tenant and multi-building business parks underway include Rampart Business Park’s Phase I and II totaling 432,163 square feet being leased by CBRE, 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, and DCT Industrial started two buildings, one in the Greenspoint area and one in the Northwest.