Q1 2023 Commercial Real Estate Report: Houston: TX
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Compared to last year's record-breaking activity, Houston's commercial real estate market has started to moderate. Rental rates increased across all sectors, though office space continues to struggle to adapt to the new norm of remote work.
Houston's high population and job growth have driven demand for warehousing, multifamily, and retail, which all posted positive absorption this quarter.
General Market Trends
As of Q1 2023, the average price for commercial real estate in Houston is $65.67 per square foot with an average size of 12,531 square feet per transaction, a 0.95% and 0.10% change over the last 90 days, respectively.
Median prices for Houston commercial real estate rose 1.63% to $513,000, and the median size rose 0.32% to 4,502 square feet.
Notable Commercial Real Estate Activity in Houston, TX
Below are some of the most notable commercial real estate transactions this quarter.
- Quarter North's 50,000 square foot lease at 3737 Buffalo Speedway Ave;
- A 980,000 square foot sale at San Felipe Plaza;
- Penske Logistics' 603,780 square foot lease at South Belt Central;
- Igloo's 560,000 square foot lease at Woods Road BP Building 1; and,
- BlueTriton Brands 249,462 square foot lease at 225 Logistics Center.
Most of these notable leasing transactions were for industrial space.
Houston Q1 2023 Office Space Performance
The Houston office space market posted 94,427 square feet of negative absorption this quarter, reversing the trend of positive absorption that we saw in the past two quarters. Average rental rates for Houston office space fell slightly from $30.84 per square foot in Q4 2022 to $29,73 per square foot in Q1 2023.
Vacancy rates, however, fell 20 basis points from 23.3% to 23.1%, keeping vacancies more or less static over the past few quarters. Leasing activity was also down to 2.6 million square feet from 3.8 million square feet last quarter.
Like many other cities, the Houston office market is still struggling due to decreased demand from the prevalence of hybrid and remote work.
Houston Office Space Construction and Volume
The Houston office space market posted no new additions this quarter as opposed to 54,800 square feet last quarter and 529,900 square feet in Q1 2022.
However, construction has picked up slightly in Q1 2023, with 1.9 million square feet under construction—a nearly 1 million square foot increase from the same time last year.
Houston Industrial Real Estate Performance in Q1 2023
Houston's industrial real estate market posted 4.8 million square feet of positive absorption, down from last quarter. Average leasing rates rose to $0.78 per square foot, coming out to a 19.4% increase since Q1 2022. The market continues to grow as Houston's suburban population expands, increasing demand for services.
Average prices for industrial real estate in Houston rose nearly 18.49% to $51.76 over the past 90 days, with an average price of $2.5 million. The average size of available properties is 49,195 square feet.
After record lows last year, vacancy rates rose to 4.4%, most of which was due to new product additions to the market. Spreads between vacancy rates and availability rates narrowed this quarter.
Industrial Construction and Volume
Houston added about 7.8 million square feet of product this quarter—significantly more than the 3.1 million square feet at the same time last year. Most of this new product was in the West submarket.
As of the end of Q1 2023, the Houston industrial real estate market has approximately 2.7 million square feet of new units under construction. The North and Southeast submarkets are set to absorb the majority of this new space.
Houston Multifamily Real Estate Performance in Q1 2023
As the second fastest-growing metro area in the country, Houston's multifamily real estate market saw a strong quarter, with over 1,000 net positive move-ins and sustained housing development. Average rents rose to $1,294 per month with rental growth trailing just under 2%.
Rental growth was lower than in Q2 and Q3 2022, and occupancy rates fell slightly to 89.9% due to new product additions. Nevertheless, Houston's employment and job growth metrics are strong, meaning demand for multifamily housing shouldn't be going anywhere any time soon.
Multifamily Construction and Volume
The development pipeline for multifamily real estate in Houston has been strong this quarter, with over 3,700 units added to the city's housing stock, mostly in the Central and Northwest submarkets.
As of the end of Q1 2023, Houston has over 11,000 new multifamily units under construction, though deliveries on some might be delayed due to longer permitting timelines.
Houston Retail Performance in Q1 2023
Hoston's retail market saw both positives and negatives this quarter: Absorption was positive at nearly 1 million square feet but fell slightly from last quarter. Occupancy rates rose 10 basis points thanks to the influx of new space, and average triple-net (NNN) leasing rates settled at $26.15 per square foot.
The stick in the mud is that consumer activity is down in Houston, likely a consequence of rising interest rates making spending on credit harder to justify. Construction activity is practically unchanged since last quarter.
Takeaways for Commercial Real Estate Investors
Overall, the Houston commercial real estate market had a strong quarter despite moderating after last year's record-breaking performance. All sectors saw average rents increase, and industrial, retail, and multifamily saw positive absorption and substantial deliveries.
Houston industrial real estate was the standout performance this quarter, with the city's multifamily and retail sectors also showing strong fundamentals.
Given similar growth in Dallas, Austin, and San Antonio, Houston's commercial real estate market currently sits in an advantageous position. Investors can expect continued gains in industrial and multifamily real estate, though retail may slow down slightly due to high interest rates. Office space is still undergoing a market correction, but construction continues apace.
Methodology
This report was written with property information from the MyEListing.com platform in corroboration with other freely available commercial real estate research data.
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