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Market Research - Houston

United States: Houston office market - 2017

- Mixed signals of recovery
- Total availability declines, vacancy increases
- Investment rebounds sharply over 2017

Mixed signals of recovery

The Houston economy continued to rebound from the impacts of Hurricane Harvey over the fourth quarter. The city added a staggering 63,600 jobs during the period, as seasonal hiring, Hurricane Harvey recovery efforts, manufacturing, and health and education services lead the way. The energy sector also continued its slow but steady recovery over the fourth quarter. WTI rose past $50 per barrel while North American crude production increased to all-time highs. Considering that President Trump is set to allow oil and gas drilling in nearly all U.S. coastal waters, production should only increase. The Port of Houston has also helped contribute the recovery of the city as expansions to the port and Panama Canal have resulted in record TEU activity through the Port. More favorable corporate and individual tax rates will take hold in 2018, positioning the city to continue recovery efforts well into the new year.

Total availability declines, vacancy increases

The overall office availability rate decreased 0.5% over the quarter, ending the year at 22.8%. The fourth quarter saw several tenants (Stewart Title, Empyrean Benefits Solutions and Saudi Aramco) opt to leverage sublease alternatives. While decreases in sublease space triggered declines in availability, vacancy continued to rise over the quarter. Overall direct vacancy ended 2017 at 15.5%, increasing by 1.7% year-over-year. Class A direct vacancy ended the year at 15.2%, up 2.1% annually. Class B direct vacancy increased by 1.1% year-over-year, ending 2017 at 16.7%. With 1.3 million SF of sublease space set to expire over the next 12 months, direct vacancy is anticipated to continue increasing through the first half of 2018. This is especially pronounced in the North Houston District where 868,845 SF is set to expire by year-end 2018.

Investment rebounds sharply over 2017

Investment activity in Houston rebounded sharply in 2017, as annual sales totaled $3.8 billion, marking the highest total since registering $4.6 billion in 2013. Regardless of elevated vacancy figures, the strength in the underlying fundamentals of the market have investors buying into Houston's future. Of particular interest to investors are well located urban infill properties with upside available through renovation and lobby/service activation. Notable properties that traded over the course of 2017 include Greenway Plaza (4.9 million SF, $210 PSF), Houston Center (4.2 million SF, $218 PSF) and Greenspoint Place (2.0 million SF, $35 PSF). Sales for the quarter totaled $1.3 billion, bolstered by the closing of Houston Center, as Brookfield Properties officially acquired the 4.2 million SF Class A property portfolio for $875 million.

AAG Houston 2017
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