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The Houston office market recorded 244,681 square feet of net absorption in Q2/24, up from 88,423 square feet in Q2/23. Absorption occurs when there is a change in occupancy.
In Q1, however, the market logged 743,599 square feet of negative absorption, leaving the market with 301,696 square feet of negative net absorption so far this year. This has been the pattern in three of the last five years and five of the last ten. Since ‘14, net absorption has averaged a negative 546,000 square feet in the first half of the year.
Negative net absorption in recent years has increased the available office space. In Q2/15 the availability rate (vacant, soon-to-be vacant, and available for sublet) was 18.1 percent. By Q2/24, it had risen to 27.2 percent, a total of 70.5 million square feet.
The breakdown of available space by type:
Given current availability, expiring leases, and historic absorption levels, the Class B and C office markets will continue to struggle to return to healthy vacancy levels.
Negative net absorption has prevented landlords from raising rents. Gross asking rent in Q2/24 was $29.92 and has remained in the range of $27.95 to $30.50 since ’15. Gross rents encompass taxes, insurance, maintenance, and rent paid to the owner. Adjusted for inflation, gross rents have decreased.
Office construction is constrained by the oversupply of space and lack of rent growth. ’22 saw the least new space (1.2 million sq. ft.) come onto the market since ’12. Almost 3.0 million square feet of space was delivered in ’23, and 745,000 square feet through the first half of ‘24. Houston's under-construction pipeline has thinned out notably over the past several years. As of Q2/24, there were 1.8 million square feet underway, equal to 0.7 percent of Houston's total inventory of 257.3 million square feet, and less than half of the 10-year average of 4.6 million square feet. Most projects under construction (60 percent) are office/medical space in the Katy/Grand Parkway West, Northwest, and The Woodlands submarkets. Total new construction was about 88 percent preleased, as of the second quarter, minimizing the impact of new supply.
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 at the end of Q2/24. 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 newer buildings and those with better amenities. At the end of Q2/24, the vacancy rate for newer buildings completed in the past 15 years averaged 15.8 percent compared to 26.9 percent in older, vintage buildings completed before ‘09.
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
Houston recorded 244,681 SF of net absorption in Q2/24.
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