Q3 2022 Office Space Report: Houston, TX
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Houston’s office market has lagged behind with the continued desire for work-from-home lifestyles. However, recent data from Kastle Systems reveals that over 50% of local employees are returning to their offices – a result higher than many other top 10 markets’ averages.
Despite this promising trend, larger businesses seem to be adopting a more conservative approach heading into an impending economic downturn.
Houston’s office space experienced negative absorption this quarter, with 400,000 square feet of loss and overall vacancy increasing from 22% to 23% year-over-year, where the country sits at an average of 19%.
As such, this trend will likely continue to face throughout the rest of 2022.
General Area Overview & Demographics
Houston, Texas, is the fourth-largest city in the United States and a thriving metropolitan area. With its population of over 2.3 million people, Houston is one of the most diverse cities in America, with large Hispanic, Asian, and African American communities. Houston’s economy is driven mainly by energy, manufacturing, healthcare, aerospace, technology, and finance sectors.
The city of Houston has undergone significant economic growth, including and especially its industrial sector, in recent years despite downturns experienced by other parts of the country.
The Houston metro area contains multiple Fortune 500 companies, such as Phillips 66 and Halliburton Corporation, which continue to be major contributors to the local economy. Houston is also home to major hospitals such as MD Anderson Cancer Center and Memorial Hermann Health System.
Houston’s educational system also plays a significant role in driving economic development. The city has over 1,000 public schools and more than 200 private schools available to students – making it one of the most highly educated cities in America.
More than half of Houston’s adult population holds a Bachelor’s degree or higher, while 40% have an Associate’s degree or some college experience.
Summary of Houston Office Space Performance in Q3 2022
In Q3 of 2022, it’s clear that Class B office space took the greatest hit. Class A office buildings account for less than 3% of the total negative absorption, while Class B office buildings account for nearly 67%, leaving Class C between the two with the remaining percentage.
Newer buildings with nicer amenities and better packages are being privileged to older buildings.
This would make sense as trying to entice workers from their homes into the office space is vital in shifting employees back into a professional environment and creating demand for the commercial office space market.
This quarter has also brought about 97,000 square feet of new inventory, with an additional 2,000,000 square feet still under construction.
What are office space rents like in Houston?
As vacancy rates have increased over Q2 2022’s rates, asking rental rates have declined slightly this quarter after seeing an upward trend from previous quarters.
The following are the average rental rates for Houston’s two major submarket groups.
- Suburban’s asking rental rate is $27.00.
- Central Business District’s (CBD) asking rental rate is $42.40.
Depending on the Class within those submarket groups, the rate will fluctuate significantly, with Class A buildings going as high as nearly $45.00 and Class C going as low as $24.00 in the CBD.
Purchase & Leasing Activity
Purchase and leasing activity for Houston’s office space market has become sluggish throughout the year.
Demand for new office space is at an all-time low year-over-year while vacancy rates continue to rise. Due to this, landlords appear less likely to accept shorter lease agreements and are looking for tenants willing to agree to longer terms.
These factors have also made the prospect of purchasing less appealing at this time.
Notable Office Space Deals in Houston in Q3 2022
The following office deals and leases occurred in Houston this quarter.
- Greystar’s leasing of about 70,000 square feet.
- Perry Homes’ leasing of about 80,000 square feet.
- Centric’s leasing of about 50,000 square feet.
These are a few among other transactions that took place.
New Office Space Development Activity in Houston in Q3 2022
Several Class A office spaces in development are projected to be completed in 2023.
Axiom Space broke ground on their office space in Houston. This 400,000-square-foot facility will serve as the headquarters for its operations.
Towne Centre Two is also under construction, providing future tenants with a premiere location near Katy Freeway. The projected completion for this office space is September 2023.
Market Forecast for Houston’s Office Space Market in 2023
As 2023 ensues, there are no indicators that Houston’s office space market will make any sudden changes toward heating up.
While the national unemployment rate sits around 3.7%, Houston’s is at 4.6%, putting it on the higher end for major metropolitan cities in the US.
Vacancy rates are projected to trend upward slightly throughout 2023.
Takeaways for Office Space Investors
For investors looking for promising opportunities in 2023, there are likely better options to consider other than Houston until indicators show otherwise.
If one wants to enter this market, Class A buildings are the clear winner, while Class B buildings should be avoided at all costs.
As always, each investor must do their own research to decide what’s best for them and their particular situation.
Find Commercial Real Estate in Houston, TX With Help From a Local Commercial Real Estate Agent or Broker
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