Commentary
Fundamentals in Houston's prime office market trended downwards at all levels in the first quarter, while Skanska completed its newest 386,323-square-foot building, 1550 on the Green, in the Central Business District (CBD). The new property is currently 35% leased by law firm Norton Rose Fulbright, which is expected to be occupied by the third quarter of the year.
The completion of this building and one smaller property in the Southwest leaves the office market with four buildings under construction with just 214,437 square feet, a record low. Just one property, a 32,000 square foot property, broke ground in the Southwest in the first quarter. CityCenter 6, a 308,000-square-foot property planned for the Katy Freeway West/Energy Corridor, is scheduled to break ground in the second quarter. The project comes after securing lead tenant Dow Chemical Co., which pre-leased about 75 percent of the building, or 229,658 square feet, in December.
Flight to quality continues
The flight to quality trend remains on track, with Class A properties accounting for 65.5% of the 2.3 million square feet of leasing activity in the first quarter, a total down 17.3% from the previous quarter and 41.1% year-over-year. Of the total leasing in the quarter, 46.0% occurred at properties in West Houston, including three different buildings within Westchase's CityWest Place development. Noble Corporation topped the list by size, leasing 110,250 square feet at 2101 CityWest. Bechtel signed a 77,262 square foot expansion lease at 2103 CityWest, and Enstor Gas leased 43,598 square feet at 2107 CityWest.
Space businesses are also contributing to the city's growth: Axiom Space, which recently opened a new headquarters building at the Houston Spaceport, also renovated a 63,716-square-foot space at Hercules II at 1290 Hercules in the NASA/Clear Lake submarket. Additionally, Texas A&M University recently announced plans to build a state-of-the-art research and training facility next to NASA's Johnson Space Center in the submarket, continuing the region's momentum in revolutionizing space exploration.
However, demand has not kept up with supply, with net absorption falling to negative 616,399 square feet in the first quarter following positive absorption in the previous quarter. The downturn is largely due to companies downsizing their footprints as they lease new space. A big example this quarter was US Oncology in The Woodlands, which moved from 200,000 square feet at 10101 Woodrock Forest to 26,530 square feet at The Woodlands Towers at The Waterway. Invesco also contributed, leaving 194,111 square feet at 11 Greenway Plaza as it signed a new, scaled-down deal for 180,218 square feet in 2022.
The CBD recorded positive absorption in the first quarter and accounted for the two largest occupancies: Cheniere Energy occupied 168,204 square feet in Texas Tower, about 20,000 square feet less than Pennzoil Place North Tower, while EnLink Midstream leased and occupied 61,682 square feet in Hess Tower.
As businesses relocate and downsize from their current spaces, the overall vacancy rate fell to 26.7% in the first quarter, down 50 basis points from the previous quarter and 90 basis points year-over-year. By comparison, another factor supporting the flight-to-quality trend is the overall vacancy rate for properties built since 2015, at 14.8%.
Vacancy rates are likely to continue to fall over the next few quarters as more tenants downsize and landlords struggle with rising operating costs amid tough economic conditions.