Houston office market reports
Q1 2023
Houston’s metro economy has performed quite well with 137k jobs created over the trailing 12 months ending February 2023, while unemployment remains near historic lows. Office-using jobs have remarkably grown by 5.6% with 40,600 new positions added over the period. However, office market fundamentals remain soft as there remains a disconnect between office-using job growth and space demand as flexible work has changed how companies and employees use office space.
Even though the office sector continues to experience softness with a significant amount of availability, trophy and class A+ properties continue to outperform the broader market. With modest construction underway and flight-to-quality a key trend, leasing activity has been primarily concentrated in highly amenitized, class A assets as tenants gravitate to better quality space to ensure the luxuries employees experienced while working from home also exist in the office as more companies return to the office.
Negative absorption persists but vacancy near stabilization
The office market posted 148k square feet (sf) of negative absorption in the first quarter of 2023 as companies reduced their physical footprint, causing vacancy to rise to 26.9% hitting its highest level on record. However, there are signs of stabilization as vacancy has experienced its slowest annual increase since the oil bust emerged in 2015.
Class A direct vacancy for product built since 2010
Despite the pullback in absorption, trophy and class A+ buildings continue to outperform the broader market and capture a larger share of the demand. For instance, the direct vacancy rate for trophy assets stands at 16% while new class A product built since 2010 is 11.6%.
Leasing activity improvement driven by class A sector
Office leasing activity has continued to gain traction with 2.6 msf leased in the first quarter of 2023. Even though office leasing activity experienced a temporary pullback during the first quarter compared to a year ago, the class A sector continues to account for a large share of the leasing demand with 10 msf leased over the trailing 12 months, up 35.4% year over year.
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