HOUSTON - eTradeWire -- "Houston's office market activity increased during the second quarter with numerous relocations, especially in the Katy Freeway submarket. While activity has increased, tenant occupancy size requirements are reducing, putting added pressure on vacancy rates in the process.

High vacancies in most submarkets are pressuring landlords to be creative to maintain or improve occupancies."

Patrick Duffy | President

Key Takeaways

• Office vacancy rate stabilizes with no change
• Sublease space declines for second consecutive quarter
• Net absorption positive for both quarters
• Leasing volume increases

Houston Highlights

Houston's office market posted minimum net absorption of 35,777 square feet in Q2 2023, but this activity continued a positive trend for the year for a mid-year total of 240,815 square feet. The overall average vacancy rate stabilized at 22.1% for the year, dropping from 23.5% year-over-year. Leasing activity jumped 23.4% from a sluggish first quarter, recording 3.5 million square feet. The Katy Freeway submarket reported 38% of the total, although many of the largest new signed leases represent reductions in overall square footage. The under-construction pipeline remains limited at 1.8 million square feet, while three buildings totaling 227,848 square feet in two submarkets delivered during second quarter. Houston's overall average gross rental rates nudged up to $29.87 from first quarter's $29.73 but declined from the same period last year. Houston's Class A average rental rate increased to $35.46 per square foot from $34.76 in Q1 2023.

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Commentary

By Greg Young, Senior Vice President, Colliers Mortgage

Houston's office market continues to face challenges as we enter the sixth quarter of the new interest-rate environment. During recent earnings calls, most large investment banks reported they are sharply increasing credit loss reserves primarily due to office loan maturities through 2024. That being said, there is cautious optimism for a broad range of office assets in the Bayou City with some bright spots, some acute pain points and some economic realities being reset.

The Good

There are undeniable positive trends going on in certain submarkets in Houston. Job growth through May of this year is +18,500. Employment hit 3.4 million (an all-time high for Houston), we had positive absorption of 240,815 square feet at mid-year, vacancy for Class A space was flat quarter over quarter, and leasing activity is sharply up to 3.5 million square feet...

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See the full report here: https://www.colliers.com/en/research/houston/q2-2023-houston-office