Q1 2023 | Houston Office Market Report

• Office vacancy rate decreases 20 basis points
• Sublease space declines during first quarter
• Net absorption reverts back to negative level
• New construction remains limited

Houston Highlights

Houston’s office market posted negative net absorption of 94,427 square feet in Q1 2023, reversing from positive absorption recorded both in the previous quarter and year-over-year. The overall average vacancy rate dipped marginally by 20 basis points between quarters from 23.3% to 23.1%. No new inventory was added during the first quarter while 2.0 million square feet (MSF) of office space is under construction. Houston’s overall average gross rental rates increased during last year but fell slightly on a quarterly basis. Houston’s Class A overall average full-service rental rate dropped over the quarter from $35.46 per square foot (PSF) in Q4 2022 to $34.76 PSF in Q1 2023. Leasing activity also slowed, recording 2.6 MSF compared to 3.8 MSF last quarter and 3.3 MSF year-over-year.

Houston’s office market is facing challenges with an average availability rate of almost 27%. The post-pandemic world has resulted in an increasing trend of designing smarter and more efficient office spaces, leading to a reduction in square-footage needs. This has allowed tenants to budget for higher rents required to get into higher quality office buildings. While this may seem challenging, Houston ranks #1 in the nation at 61% “Return to Work” practices, indicating that the city’s workforce is taking initiatives to re-evaluate their office needs.

Despite Houston posting another quarter of negative absorption of 94,427 square feet (SF), there is hope for the Bayou City. The Kastle System’s barometer shows that Houston’s workforce will continue to rise weekly, with many corporations, including JPMorgan Chase & Co., tightening their office attendance protocols. To accommodate this, many organizations are offering flexible workspaces tailored to their company’s specific needs.

Another trend emerging is the “commute reduction” initiative. Employees prefer a commute that falls within 5 to 15 minutes, according to Gensler, one of the nation’s leading architectural/ design firms. Some Houston suburban submarkets are reporting lower vacancy rates than the inside-the-Loop submarkets, and that trend is expected to continue widening. The flight-to-quality trend remains relevant, but management teams are being challenged by the workforce to prioritize “commute reduction.”

The past decade has seen around 80% of Houston’s population growth in the West, Northwest, and North of the 610 Loop. Employers are taking note of this trend, and the live-work-play markets, such as The Woodlands, Memorial City, and CityCentre, are becoming increasingly popular. These areas are easily 15-to-30 minutes closer to the areas of increased growth and offer more affordable housing options than the Galleria/Downtown submarkets. The western Energy Corridor, with or without walkable amenities, is also seeing gains in occupancy.

Reducing office supply

To address Houston’s vacancy problem, a solution may be to reduce its amount of supply. Approximately 40 million square feet of office space is expected to become obsolete over the next decade. Adaptive reuse plans to convert older, less desirable office buildings to other uses such as residential or hospitality have been a popular topic of discussion. Recent examples of this initiative include two Central Business District (CBD) properties: 800 Bell, the former ExxonMobil headquarters at 1.3 million square feet, as well as 1801 Smith Street, a 450,000-square-foot office tower; both are anticipated to be converted into residential by new ownership, resulting in a large cut in the CBD’s office supply.

Leasing activity slowed during the first quarter, but several larger transactions were signed in the Energy Corridor and Bellaire/West Loop. Kiewit Corp. signed for 277,105 square feet, and Community Health Choice signed for 82,706 square feet.

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