Houston's Office Market Going Full-Speed Ahead

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The Houston office market is vibrant, thanks to the metro's strong economy that generated 95,800 new jobs in the 12-month period ending October 31, 2012, the second highest number in the nation. The market had an unemployment rate of 6.2% as of October 31, 2012, down from 7.7% in October 2011. The national unemployment rate was 7.9% in October 2012, according to the US Bureau of Labor Statistics and Delta Associates.

Perhaps the biggest news in Houston's office market in 2012 was the growth in the construction pipeline. According to a fourth quarter 2012 Delta Associates/Transwestern office market report, there were 4.6 million square feet of space under construction or renovation at the end of 2012, compared to 3.6 million square feet at the end of third quarter 2012 and 1.4 million square feet at year-end 2011. Space under construction at year-end 2012 was 39.9% pre-leased compared to 47.2% at year-end 2011.

Professional/business services and energy-related firms drove leasing activity in the fourth quarter in Houston's office market, according to the Delta/Transwestern office market report.  Vacancies had continued to decline, falling to 10.6% at year-end 2012 and asking rents increased by approximately 4.8% in 2012.

Net absorption of office space totaled 1.4 million square feet in fourth quarter of 2012, compared to 860,000 square feet in the third quarter. Both Class A and Class B office space did well in fourth quarter 2012, according to the Delta/Transwestern report. Class A net absorption was 752,000 square feet, while there was 643,000 square feet of absorption in fourth quarter 2012.
For all of 2012, the Houston metro had 4.2 million square feet of net office absorption, compared to the 3.8 million square feet absorbed in 2011.

Positive absorption in the fourth quarter was driven by the Katy Freeway/Energy Corridor submarket--which had 1.2 million square feet of net absorption in all of 2012, followed by Northwest with 537,000 square feet, South Main/Medical Center with 112,000 square feet, Westchase with 694,000 square feet and the Woodlands/Conroe submarket, which had 640,000 square feet of net absorption in 2012. 

The office market in the Katy Freeway/Energy Corridor in Houston thrives because of the energy business. Home to BP America, Conoco Phillips, Exxon Mobil and the Shell Oil Company, this submarket had a vacancy rate in fourth quarter 2012 of 6.6%. This compares to the overall vacancy rate in the Houston metro (including sublet space) of 10.6% at year-end 2012, down from 10.9% in the third quarter of 2012 and 12% at year-end 2011.

Sales of office buildings in Houston returned to peak levels faster than in other major markets in the US, according to the Delta/Transwestern report, again, thanks largely to the energy industry. "The surge in hydraulic fracturing activities gives local energy companies the confidence and incentive to expand their workforces, which translates into greater interest in Houston's office assets," according to the Delta/Transwestern report.

With the exception of 2009, the nadir of the financial downturn in the country, office values in Houston have risen nearly every year since 2003 and will likely keep growing in the foreseeable future, as market conditions continue to improve, said the report