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The office market continues to struggle. Houston recorded 680,000 square feet of negative net absorption in Q1/24, compared to the 300,000 square feet of positive absorption in Q1/23. Negative absorption occurs when more space is vacated than occupied.
The Houston market first saw significant negative net absorption in early ’14, 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 ’15, net absorption has averaged negative 800,000 square feet annually.
Negative net absorption in recent years has increased the amount of available office space. In Q4/14, at the end of the Fracking Boom, the availability rate (direct and sublet) was 19.0%. By Q1/24, it had risen to 27.8%, totaling 70.2 million square feet.
The breakdown of available space by type:
Given current availability, expiring leases, and historic absorption levels, the Class B and Class C office markets may struggle to return to healthier vacancy levels.
Negative net absorption has prevented landlords from raising rents. Gross rent in Q1/24 was $29.74, remaining in the range of $27.98 to $30.51 since 2015. Gross rents encompass taxes, insurance, maintenance, and rent paid to the owner. Adjusted for inflation, gross rents have decreased.
The oversupply of office space and the lack of rent growth have constrained office construction. ’22 saw the least amount of new space (863,000 sq. ft.) come onto the market since ’10. Almost 2.3 million square feet of space was delivered in ’23, and 445,000 square feet has been delivered in Q1/24. Houston's under-construction pipeline has thinned out notably over the past several years. As of Q1/24, there were 3.2 million square feet underway. Projects under construction include several large trophy assets in the South Main/Medical Center, the CBD, Katy Freeway East, and The Woodlands submarkets—representing a mix of life sciences, spec, and build-to-suit development. This new construction was about 75% preleased, as of the first 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 Q1 ’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 ’Q1/24, the vacancy rate for newer buildings completed in the past 15 years averaged 17.0 percent compared to 26.8 percent in older, vintage buildings completed before 2009.
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 680,000 SF of negative net absorption in Q1/24.
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