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I MARKET OUTLOOK
HOUSTON VACANCY INCREASES DESPITE POSITIVE ABSORPTION
First quarter vacancy rates began to show the impact of falling oil prices, despite the fact that absorption remained positive. The average vacancy rate increased to 11.6% with total positive net absorption of 1.7 million square feet. Nonetheless, net absorption was down from the previous quarter’s 2.6 million square feet. Vacant sublease space also increased from 1.8 million square feet at year end to 2 million square feet.
Houston’s CBD showed a significant drop in its absorption figures with 15,984 square feet of negative absorption, down from over 400,000 square feet of positive absorption at year end. The Woodlands took the prize for most space absorbed in the quarter with almost 1.7 million square feet taken up. The Katy Freeway market appears to be slowing down but was still positive with 344,213 square feet absorbed. The Northwest Market also showed a strong 608,542 square feet of positive absorption while the Southwest market had almost 320,000 square feet taken.
Overall, citywide rental rates continued to climb slightly, ending the year at $27.76 per rentable square foot. First quarter average Class A rates dropped slightly to $34.45, down 6¢ from year-end. Class B rental rates citywide continued an upward trend to $21.45, 10¢ more per square foot than at year-end.
A total of 24 buildings were delivered to the market in the first quarter, totaling over 4.4 million rentable square feet. New building starts are also slowing down with 15 million square feet under construction; down from 17.9 million rentable square feet at year-end.
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I THE RENAUD SERO DIFFERENCE
M&A ACTIVITY ADDS ADDITIONAL THREAT TO HOUSTON OFFICE MARKET
The Houston office market is beginning to slow down still there are no signs of panic, though landlords are definitely getting nervous. According to several landlord representatives, quite a few companies have decided to hold tight with short term lease extensions rather than proceed with relocations, expansions or long term renewals.
Both direct vacancy and sublease vacancy rates have increased slightly as have rental rates. However, it remains to be seen what the long term effect will be if oil prices remain low.
Regardless of what happens to the price of oil though, there is still 15 million square feet of new space under construction. Though it is said to be 65% preleased, that still means that over 5 million square feet of the new construction is unleased and will be vacant. Furthermore, companies will be vacating older space to occupy the 65% of new construction as it comes on line, adding additional second generation space to the market.
The price of oil has prompted more mergers and acquisitions and since many of the companies have duplicate operations and facilities, it is reasonable to expect that some of those mergers will leave more space vacant in the Houston market.
Halliburton, for instance, occupies 560,000 square feet in its Bellaire headquarters while Baker Hughes’ headquarters on Allen Parkway has over 120,000 square feet. C&J Services, which acquired its larger competitor, Nabors Industries, occupies 125,000 sf in its new headquarters in Westchase, while Nabors occupies 310,000 square feet in the North Belt area.
Shell Oil, also just announced its intention to acquire BG Group. Shell occupies over 700,000 square feet in the CBD while BG Group occupies over 360,000 square feet around the corner. Kinder Morgan, another large CBD tenant is also looking for acquisitions, according to a recent article in the HBJ. It remains to be seen if any that come to fruition impact the Houston office market.
Since hiring activity has also slowed down, one cannot help but think that by the end of the year, we will see much larger concession packages being offered if not lower rental rates.
For a quick review of your lease and a discussion of the opportunities for your company in the market, please feel free to contact Renaud Sero Advisors, Inc. We look forward to serving you.
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