Greater Houston’s Office Activity Slowly Recovers

Greater Houston’s office sector showed signs of improvement in the first seven months of the year, with completions increasing 4.1 percent year-over year, according to CommercialEdge. The metro also saw a rise in construction starts during the same period compared to 2023.

Six developments totaling about 275,417 square feet broke ground. These positive trends can also be attributed to an increased focus on the medical office building sector, driven by a growing ageing population.

However, the metro continues to face some challenges. The market’s vacancy rate remained considerably above the national average, standing at 23.8 percent. Assets in the market traded for $103 per square foot on average, well below other top-performing Southwest cities.

As more value in the office sector is being removed due to ongoing challenges, CommercialEdge has developed a tool to highlight the likelihood of how assets in some markets can be repurposed into housing space. The data provider’s Conversion Feasibility Index shows that, while Texas markets don’t rank among the top markets for potential conversion, there is a lot of nationwide potential for the process.

Under-construction pipeline lags national figures

As of July, Greater Houston’s office sector had more than 1.8 million square feet underway, representing 0.7 percent of total inventory stock. The construction rate was below the 1.1 percent U.S. average and trailed most of its peer markets, including Austin (4.6 percent), Dallas (1.8 percent) and Atlanta (0.9 percent), but fared better than Phoenix (0.4 percent).

Texas A&M University and Medistar Corp. will complete Horizon Tower by the end of the year. Image courtesy of JLL

However, six projects started construction in the first seven months of the year, which are expected to total 275,417 square feet upon completion. This figure is more than six times larger year-over-year.

Houston’s office sector is also seeing a rise in medical office developments, possibly caused by the ageing population—by 2034, the metro will see the nation’s third-largest increase in cohorts aged 65 and older.

Earlier this year, North Cypress Land Ventures LLC started construction on the first phase of Grand Cypress Medical Pavilions in Cypress, Texas. The 30-acre, $600 million project will come online over the course of five years.

Office completions rose in the first half of 2024

Houston’s office sector saw a 4.1 percent growth in year-over-year deliveries, with 13 properties coming online in the first seven months of this year. The developments, totaling more than 1.4 million square feet, represent 0.5 percent of total inventory stock.

The metro fared better than most peer markets, surpassing Atlanta (1.1 million square feet), Austin (945,519 square feet) and Dallas (850,500 square feet). The Bay Area (958,030 square feet) and Raleigh – Durham (937,470 square feet) performed better.

By the end of the year, Texas A&M University and Medistar Corp. are set to complete Horizon Tower, a 485,000-square-foot building within the $550 million Texas A&M Innovation Plaza. The life sciences and medical office tower will further boost the metro’s MOB inventory.

Sale prices still below other Sun Belt markets

Greater Houston’s office sector registered $482 million in investment volume year-to-date as of July. Assets traded for $103 per square foot on average, well below the $173 national average and peer markets. Dallas ($116 per square foot), Atlanta ($146 per square foot) and Phoenix ($171 per square foot) are some of the metros that performed better.

Office deals are getting tougher to close because of a mix of factors, including shifting market conditions, changing tenant needs and more scrutiny during negotiations. This trend is also seen in Houston’s performance, where the total sales volume for the second quarter saw a year-over-year decline of 32.3%, clocking in at only $109.1 million.

However, pricier deals are still happening. In June, Howard Hughes Holdings purchased Waterway Plaza II, a 142,400-square-foot office building in Greater Houston for $19.2 million. The price per square foot was almost $135.

Houston’s office vacancy rate remains consistent

Houston’s office vacancy rate at the end of July remained relatively stable year-over-year, increasing only by 20 basis points to 23.8 percent. Although the rise was modest, the rate remains significantly higher than the 18.1 percent national average.

Peer markets such as Atlanta (18.4 percent), Dallas (21.8 percent) and Austin (22.9 percent) also performed better than Greater Houston. The metro’s average listing rate during the same period was $29.82, below the $31.67 U.S. figure.

Notable office activities in the area include Camden Property Trust’s decision to relocate its headquarters to 104,013 square feet at Invesco Real Estate’s Williams Tower in Houston. The 1.4 million-square-foot office property is the tallest building outside of the metro’s central business district.

Additionally, Skanska’s 1550 on the Green building that opened in February is seeing a rising in occupancy, proving that there’s still interest for new, Class A properties. In June, Boston Consulting Group inked a 12-year lease for about 53,000 square feet. The company is set to move in by the end of next year.

Coworking slightly below national average

Greater Houston’s office sector had more than 4.3 million square feet of shared space as of July. Accounting for 1.7 percent of its total inventory, the metro’s coworking space slightly lagged behind the 1.8 percent national average.

Raleigh – Duram (2.5 percent), Denver (2.2 percent) and Atlanta (2.1 percent) surpassed the market, while Philadelphia (1.4 percent), Austin (1.5 percent) and Charlotte (1.6 percent) were at the opposite pole.

The coworking operator that had the largest footprint in the metro was Regus, with 540,335 square feet across 32 properties. The firm was followed by The Cannon, with 444,341 square feet and Workstyle Flexible Spaces with 429,159 square feet.

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