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Monthly Update: Office Market

Q4 '23, Latest Data
Published on 1/9/24

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The office market continues to struggle. Houston recorded 631,000 square feet of positive net absorption in ’23, only partially offsetting the 1.2 million square feet of negative absorption in ’22. Negative absorption occurs when more space is vacated than occupied. If not for the 950,000 square feet of positive absorption in the medical office market, overall absorption in Houston would have been negative last year. 

The Houston market first saw significant negative net absorption (1.0 million square feet) in Q1/15, the beginning of the Fracking Bust. The Houston market has logged negative net absorption in three of the last five, and five of the last ten years. Since 2014, over 2.5 million square feet have been returned to the market.

Negative net absorption over the years has driven up the amount of available office space. In Q4/14, the tail end of the Fracking Boom, the availability rate (direct and sublet) was 19.0 percent. As of Q4/23, it stood at 27.3 percent. That translates into 68.5 million square feet of available office space at the end of Q4/23.

Negative net absorption has hindered landlords’ ability to increase rents. Quoted gross rents have remained flat since late ’14. Gross rents include taxes, insurance, maintenance, and rent paid to the owner. Adjusted for inflation, gross rents have declined. 

The oversupply of office space and the lack of rent growth have constrained office construction. ’22 saw the least amount of new space (837,000 sq. ft.) come onto the market since ’10. Over 2.2 million square feet of space was delivered in ’23. 

Representative of the region’s growing life sciences sector, the submarket with some of the most notable projects recently completed or currently underway is the South Main/Medical Center. The 700,000-square foot Dynamic One at TMC Helix Park, which the Baylor College of Medicine anchors, was completed in Q4/23. Upon full build-out, the TMC Helix Park will include more than 5 million square feet of developed space across 37 acres.

The work-from-home trend continues to affect office occupancy. According to the Kastle Systems Back-to-Work Barometer which tallies how many employees have returned to offices based on the use of their entry cards, average office occupancy in Houston was around 60 percent in ’23. Austin and Dallas experienced comparable levels. Other metros fared much worse.

As a result, when leases come up for renewal tenants are scaling back their space needs or relocating to the newer buildings and those with better amenities. At the end of Q4/23, the vacancy rate for newer buildings, completed in the past 15 years averaged 17.3 percent compared to 27.2 percent in older, vintage buildings completed before 2008.

 

Prepared by Greater Houston Partnership Research

Patrick Jankowski, CERP
Chief Economist 
Senior Vice President, Research
pjankowski@houston.org

Leta Wauson
Research Director
lwauson@houston.org

 

 

 

 

 

 

Key Economic Indicators Real Estate
631,000 sq. ft.

Houston recorded 631,000 SF of net absorption in 2023.

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