Houston’s office market is flashing signs of recovery with increasing absorption, decreasing vacancy and huge owner-user purchases taking more than 2M SF off the market this year.
The metro saw 654K SF of net absorption in the third quarter, an increase from the previous quarter’s 415K SF, and vacancy inched down to 26.3%, according to a report from Partners Real Estate. There were 2.7M SF worth of leases and renewals during the quarter, and the fourth quarter started off strong with the city purchasing a 1.1M SF office building in Downtown Houston.
But it will take more company growth and expansion to really move the needle, a longtime broker said.
1600 Smith St. in Houston
Depressed property values allow for an increase in owner-user purchases, said Dan Boyles, a partner focused on office tenant representation at Partners Real Estate.
“When there’s low valuations, that helps justify a purchase in lieu of a lease,” Boyles said.
Houston City Council approved a $50M deal last month to purchase the 1.1M SF former Continental Airline headquarters at 1600 Smith St. in Downtown Houston, where it will house the Houston Police Department headquarters, Public Works and other departments.
Owner-user purchases often result in a downsize or net-zero change as the buyers vacate their old office properties, Boyles said. But the city occupies about 800K SF at 1200 Travis and 611 Walker, so it will have more space at 1600 Smith, Houston Public Works Director Randy Macchi said.
The 51-story building at 1600 Smith is older — it was built in 1984 — but a nice property, Boyles said.
“If it wasn’t for the distress we’ve seen, with lower valuations in the office market, a purchase like that maybe wouldn’t have occurred,” he said.
The city plans to sell its buildings at 1200 Travis and 611 Walker, which are plagued by deferred maintenance, according to KHOU.
In another large owner-occupier deal, pipeline company Energy Transfer bought the 1.2M SF office tower at 5555 San Felipe St. in April.
Starwood Property Trust took over the 41-story Galleria-area building through foreclosure in 2022 after anchor tenant Marathon Oil, which occupied more than 600K SF, left in 2021. Starwood floated plans of conversion as occupancy dwindled to 15%, according to Realty News Report.
It is now about 30% occupied, and the pipeline company will absorb all of the vacant space, Boyles said. That is a sizable expansion from the 510K SF building Energy Transfer owns and occupies at 1300 Main St., which it will now put up for sale, and the company is expected to occupy 5555 San Felipe long-term, according to Realty News Report.
“For the Galleria area, it’s a huge win,” Boyles said. “For Downtown, there’s going to be a Class-B building available for somebody to do what they will with.”
While these are significant transactions that could incrementally improve market fundamentals, they aren’t groundbreaking.
“The real needle movers are when we have companies that are expanding and growing into new space,” Boyles said. “We haven’t seen a lot of that.”
Some of the largest leases in the third quarter were offshore drilling company Seadrill leasing 69K SF at Westway III and Adtalem Global Education leasing 31K SF at Two Westway, according to the Partners report.
Other absorption boosters were emergency vehicle provider Frazer moving into its new headquarters in Sugar Land, where it occupies 179K SF. Clifford Chance LLP moved into 60K SF at Texas Tower, and engineering company Black & Veatch moved into 26K SF at Energy Tower II, according to Partners.
While the economy is unstable and major corporations may reduce headcounts, small and midsized businesses like Partners Real Estate are growing, Boyles said. And although Houston’s office market still has a significant stock of obsolete space, tenants are active and chipping away at vacancy.
“We have positive absorption,” Boyles said. “We’re definitely beyond a lot of the pandemic-related issues.”