Quarterly Market Report

Transcription

1 JULY Supply & Demand EXECUTIVE SUMMARY Office market occupancy falls again Houston s overall vacancy rate increased to 21.7% in, up 20 basis points quarter-over-quarter and 130 basis points year-over-year. Although net absorption ended at negative 49,788 sq. ft., this was a substantial improvement from the -1,435,05 sq. ft. mark tallied in Q1. Direct space was responsible for negative 723,583 sq. ft., and sublease space represented positive 20,808 sq. ft. Overall occupancy in the Houston office market remains below 80% the current rate of 78.3% is the market s lowest historical level recorded since NAI Partners began tracking office market activity in The overall average asking gross rent is up $0.05 at $28.28 per sq. ft. from last quarter, and $0.22 from a year ago. Millions Net Absorption Completions Vacancy % 20% 15% 10% 5% 0% Houston economic indicators suggest a continued positive outlook In May, a landmark 3.1 million workers were on payrolls throughout the region, according to the Texas Workforce Commission. For the 12 months ending May, metro Houston created 79,200 jobs, for a 2.% increase. Employment services, construction and manufacturing led job growth with the three sectors accounting for 45.% of the jobs created. Houston s unadjusted unemployment rate was 4.2% in May, unchanged from 4.2% in April and down from 4.8% in May In addition, the price of West Texas Intermediate crude rose from the low $0s per barrel in the early months of to an average of $70 in May, while growth in the U.S. rig count has picked up, reaching a near-three-year high in early June with 1,02 rigs. Market Indicators Current Prior Quarter Q1 Vacant Direct 19.2% 18.9% 18.3% Vacant 21.7% 21.5% 20.4% Available Direct 22.5% 22.1% 21.% Available 2.4% 25.7% 2.0% Net Absorption -49,788-1,435,05-11,858 Leasing Activity 2,957,70 4,127,049 5,33,07 Construction 1,552,713 1,278,75 2,501,84 Deliveries 83,07 240, ,79 Avg Asking Rent (Gross) $28.28 $28.23 $28.0 Inventory 230,175,95 230,092, ,847,919 Year Ago 2017 HOUSTON AUSTIN SAN ANTONIO

2 Broker s Perspective The working title for Houston s office market would likely harken Charles Dickens A Tale of Two Cities an interesting dichotomy between increasingly positive economic conditions and continuously stagnant office fundamentals. While not quite the best of times, particularly when compared to the boom days of , it s hard to ignore the sustained improvement in Houston s overall economy. The second quarter saw a record 3.1 million workers on the regional payroll, with 79,200 jobs created for the 12-month period ending May a 2.% YTY increase. With unemployment down year-over-year to 4.2% from 4.% May 2017 (although still above the national level of 3.8%), there is a persistent level of optimism the likes of which we haven t seen in years. Helping fuel that optimism is the relative stability of the price of oil over the past 12 months, steadily increasing along a positive pricing trendline. This time last year oil was hovering around $45 today that number is flirting with $75. Not to go too far out on a limb, but Houston is still an oil-and-gas town at heart, and a 0% increase in the price of oil is a sight for many sore eyes in the region. All of the above typically wouldn t portend an erratic often negative office market, but the numbers certainly bear that out. And although by no means the worst of times, we are seeing historically high vacancy, continued negative absorption including ongoing large-scale lease dispositions and an occupancy rate at its lowest level in 30-plus years. Yet, overall asking rents are up $0.22 per sq. ft. year-over-year talk about dichotomy. The answer isn t as perplexing as one would think, though. Although most brokers will tell you tenant activity levels are as strong as they ve seen in years, there are a handful of mitigating factors at work. One is that average deal size has dropped significantly since the boom years companies of all types are doing more with less. Advances in technology and workforce preferences are trending to denser and more flexible office usage. Two is the undeniable reduction in major office expansions by large energy and energy-related companies, many of which are still struggling to offload significant blocks of space they leased in a starkly different environment. Take the latest Occidental Petroleum opting to place 814,000 sq. ft. at Greenway Plaza on the sublease market in favor of acquiring Conoco Phillips former HQ in the Energy Corridor. While not quite the best of times, particularly when compared to the boom days of , it s hard to ignore the sustained improvement in Houston s overall economy. But while the market as a whole struggles to gain traction, perhaps the most interesting factor has been the unmistakable flight to quality, a trend that shows no signs of slowing down due to increasingly competitive corporate recruitment and retention. 09 Main, delivering in one of the weakest office markets in recent memory, is sitting at near-99% occupancy. Down the street, Capitol Tower is inching towards 50% preleased with delivery still a year away. Fresh off 09 Main, Hines is rumored to kick off yet another 1 million-sq.-ft. tower on Block 58, site of the former Houston Chronicle, with both a major law firm and a Big 4 accounting firm reportedly taking down a combined 50%. Alex Taghi Vice President NAI Partners This paradigm shift in the distinction between traditional Class A buildings and the newest breed of Class AA or A+ towers has forced traditionally comfortable Class A landlords into reevaluating their assets, often committing to large capital improvement projects to remain competitive in the market. These capital commitments, along with competition from the more expensive AA towers, have allowed landlords to buoy their quoted rates even in an overall slow market. Make no mistake, though the delta between quoted rates and actual effective rates ultimately negotiated can be significant. Ultimately, I believe we can expect a continuation of the current tenant-favorable market, because if there s anything these dichotomous conditions can create for the savvy tenant it s one thing opportunity. 2

3 MARKET OVERVIEW Negative net absorption decreases in Availability Rates During the second quarter of, Houston s office market still had more tenants moving out of space than tenants moving in, but less of them compared to Q1. The aggregate effect of these net occupancy losses was just under 500,000 sq. ft. of negative absorption. That lack of demand has led to vacant office space reaching 21.7%, or to put it another way: 50 million sq. ft. of office product lies empty. 30% 25% 20% 15% Direct Sublease 2.4% More than one-quarter (2.4%) of total office inventory is being marketed for lease. The difference between this figure and the vacancy rate reflects expected future move-outs. Space being marketed for sublease represents 9.4 million sq. ft. (4.1%) of the millionsq.-ft. total inventory figure. Although vacant sublease space is still financially occupied because rent is being paid, it is available to tenants, and therefore competes with both direct and new space. 10% 5% 0% The Greater Houston area will need to start absorbing more of the vacant supply to create less risk for developers who would not want to be left sitting with empty buildings. Houston s office market will continue to struggle through decreased absorption until increased economic growth returns long enough to stimulate ongoing demand. Net Absorption Direct & Sublease Millions Direct Sublease New construction remains disciplined Office construction is at 1.5 million sq. ft. in eight buildings with 50% of the space underway in Capitol Tower at 800 Capitol St. The 35-story, 778,000-sq.- ft. building, includes anchor tenant Bank of America obligated to 210,000 sq. ft. plus future availability of 495,115 sq. ft., with a delivery date in mid Also under construction is City Place 2, at 1701 City Plaza Dr. in the Woodlands, a 10-story, 32,800-sq.-ft. office building, at 93.9% leased with a scheduled delivery date of October ; and City Place 1, at 1700 City Plaza Dr., a 5-story, 149,500-sq.-ft. available office building with a scheduled delivery date of April One property delivered during, located at 4450 Harrisburg Blvd. in the Gulf Freeway/Pasadena submarket. The 4-story, 83,07-sq.-ft. BakerRipley Central office/retail building was approximately 5% leased at the time of completion. Over the last few years, developers have shown control as the construction pipeline has minimized and most spec developments have been put on hold, as the Houston office market tries to regain momentum Construction by Submarket CBD Woodlands/Conroe FM 190/Hwy Pre-Leased Space Available Space Historic Downtown tower has new owner One of downtown Houston s historic office buildings, 1001 McKinney Tower, is under new ownership. TRC Capital Partners and Amstar America has acquired 1001 McKinney, a 375,440-sq.-ft., 23-story office NASA/Clear Lake Sugar Land/E Ft Bend Thousands 3

4 building in Houston s central business district. The building is located at the corner of McKinney and Main, constructed in 1947, now a historic landmark on the National Register of Historic places. The property was sold by Cameron Management and Silverpeak Real Estate Partners and was 7% occupied at the time of the sale. Real Capital Analytics data reports year-to-date office sales volume for in the Greater Houston area at $1.1 billion, resulting in a year-over-year change of -45.4%. The majority of the buyer composition is made up of 49% institutional and 44% private. Leasing activity down, NAI Partners Sublease Index up Leasing activity during the second quarter of was at 3.0 million sq. ft., down 28% quarter over quarter, and dropping 45% compared to the amount of activity yearover-year. Class A space fulfilled 1.5 million sq. ft., while Class B space realized 1.3 million sq. ft., with direct space representing 90% of all transactions. The NAI Partners Sublease Index measured by the amount of sublease space as a percentage of total available space increased 100 basis points to 15.3% in June. Space being marketed for sublease now represents 9.3 million sq. ft. of the 1.2 million-sq.-ft. total availability figure. The Sublease Index has hovered between 14% and 1% since last October. A significant amount of the increase is due to Occidental Petroleum placing close to 814,000 sq. ft. of sublease space on the market at 5 Greenway Plaza (74,070 sq. ft.) and 3 Greenway Plaza (7,525 sq. ft.) this month. In April, Occidental Petroleum was said to be in discussions to purchase ConocoPhillips Energy Corridor campus, but word on a final decision has not yet been released. In addition, Sheridan Production Co. listed 71,34 sq. ft. of sublease space at 9 Greenway Plaza. In Houston s Energy Corridor, Kiewit Engineering Group Inc. signed a 52,834-sq.-ft. office sublease for the 14th and 15th floors of Energy Tower IV at Katy Freeway. The new office location will accommodate the company s oil, gas and chemical engineering group. BASF, the sublessor, is the largest tenant in the 429,157-sq.-ft. Class A office building, occupying 83,000 sq. ft. Despite slower leasing activity, average asking rents increase The market saw overall full-service average rates increase $0.05 per sq. ft. quarter-over-quarter to close at $28.28 per sq. ft. Year-over-year asking rents grew by $0.22 per sq. ft. although concessions such as free rent and tenant improvement allowances make posted rents less meaningful as a market indicator. Brokers report net effective rents, what a landlord ultimately gets to keep from a deal, dropping significantly once negotiations begin. Cumulative Monthly Sales Volume Houston Office Source: Real Capital Analytics Billions Leasing Activity by Submarket over 100,000 SF Historical Average Gross Asking Rent $40 $35 $30 $25 $20 $15 Galleria/West Loop Greenspoint/North Belt $ FM 190/Hwy 249 Woodlands/Conroe J F M A M J J A S O N D Energy Corridor Katy Freeway Westchase Greenway Plaza West Belt Southwest Class A Direct Class A Sublease Class B Direct Class B Sublease 2009 CBD Thousands

5 MARKET OVERVIEW Submarket Stats Submarket Statistics ( reflects Class A/B/C) Inventory Vacancy Availability Net Absorption YTD Net Absorpiton Leasing Activity Under Construction Overall Gross Avg Asking Rent ($/PSF) Houston Market 230,175, ,788-1,904,853 2,957,95 1,552, Class A 121,145, ,92-19,190 1,520,58 1,42, Class B 92,44, ,498-1,190,45 1,297,721 90, Submarket Statistics ( reflects Class A/B/C) Inventory Vacancy Availability Net Absorption YTD Net Absorpiton Leasing Activity Under Construction Overall Gross Avg Asking Rent ($/PSF) CBD 39,17, ,08-334, , , Class A 29,744, ,841-20,423 24, , Class B 8,774, , ,39 14, Bellaire 3,392, ,599-88,102 1, Class A 1,475, ,594-22,042 17, Class B 1,45, ,005-5,231 43, Energy Corridor 20,329, ,111-3,79 388, Class A 13,43, ,37-390, , Class B,433, , ,024 12, FM 190/Hwy ,532, , , , , Class A 2,951, ,915-23,239 29,557 15, Class B,439, , ,087 72,793 29, Galleria/West Loop 28,871, , , , Class A 19,08, , ,47 20, Class B 9,14, ,20-15,373 85, Greenspoint/North Belt 11,782, ,85-345,07 175, Class A 5,072, ,858-12,27 4, Class B 5,27, ,87-19,855 95, Greenway Plaza 10,852, ,84-178,2 14, Class A 7,427, ,220-9,25 97, Class B 2,921, ,737-75,31 58, Gulf Fwy/Pasadena 3,854, ,75,050 4, Class A 22, Class B 2,82, ,295 42,95 34, Katy Freeway 10,077, ,12 85, , Class A,002, ,590 32, , Class B 2,38, ,945 1,848 23, Katy/Grand Pkwy W 3,404, , ,959 89, Class A 2,085, , ,744 85, Class B 1,127, ,039-11,099 2, Kingwood/Humble 1,41, ,035-41,089 15, Class A 189, , Class B 1,084, ,817-4,815 15,

6 Submarket Statistics ( reflects Class A/B/C) Inventory Vacancy Availability Net Absorption YTD Net Absorpiton Leasing Activity Under Construction Overall Gross Avg Asking Rent ($/PSF) Medical Center 9,043, ,224-28,75 5, Class A 2,808, ,1-8,325 15, Class B 5,009, ,171 28, Midtown 5,573, ,191 3,135 7, Class A 2,00, ,753 99,173 38, Class B 2,97, ,105-2,581 37, NASA/Clear Lake/SE 8,014, ,189 41,875 97,217 51, Class A 1,985, ,044-21,251 17,84 51, Class B 5,131, ,45 58,588 73, North Loop West 4,423, ,704-32,588 44, Class A 1,188, ,875 7, Class B 2,77, ,09-49,577 44, Northeast 2,332, ,520-20,27 8, Class A 122, ,355 10, Class B 1,472, ,289-30,128 8, Northwest 3,952, ,712-10,933 70, Class A 797, ,457-9,801 12, Class B 2,277, ,808 42,159 5, Pearland/South 1,803, ,428 23,703 5, Class A 70, , , Class B 882, ,41-14, Southwest 11,789, ,297-47,02 121, Class A 2,053, ,93 49,721 12, Class B 7,148, ,42-73,089 91, Sugar Land/E Ft Bend,00, , ,253,851 38, Class A 3,489, ,4-103,814 1, Class B 2,83, ,458-11,439 49,193 38, West Belt 5,114, , , , Class A 3,359, , , , Class B 1,7, ,28-0, Westchase 15,459, ,84-223, , Class A 8,790, , ,90 8, Class B,492, ,428-91,32 102, Woodlands/Conroe 12,331, ,95 201,41 100,14 498, Class A 5,853, , ,880 33,11 47, Class B 5,33, ,98 4,221 4,38 21, Suburban 190,999, ,85-1,570,51 2,528, , Class A 91,400, , ,77 1,255,748 83, Class B 83,72, ,75-1,057,087 1,132,740 90,

7 MARKET OVERVIEW Houston Office Submarkets 1. CBD 2. Bellaire 3. Energy Corridor 4. FM Galleria/West Loop. Greenspoint/North Belt 7. Greenway Plaza 8. Gulf Fwy/Pasadena Katy Freeway Katy/Grand Pkwy W 11. Kingwood/Humble Medical Center Midtown NASA/Clear Lake/SE North Loop West Northeast 99 West Park Houston Tollway 10 Westheimer Sam Houston Tollway Nor thwest 18. Pearland/South 19. Southwest 20. Sugar Land/E Ft Bend Fort Bend Tollway West Belt 22. Westchase 23. Woodlands/Conroe Information and data within this report were obtained from sources deemed to be reliable. No warranty or representation is made to guarantee its accuracy. 7

8 JULY NAI Partners Houston Office 1900 West Loop South, Suite 500 Houston, TX tel Leta Wauson Director of Research tel