Concessions as Good as They Will Get

HOUSTON—Since the fourth quarter of 2014, the office market has been characterized by rising vacancy rates, flattening asking rents, growing concession packages and a glut of sublease space. The phenomenon of 12 to 15 months of free rent on a 10-year deal is not uncommon for class-A space as well as tenant improvement allowances at more than $50 per square foot.

While vacancy rates and asking rents maintained these trajectories through the first quarter of 2018, concessions appear to be leveling off as more tenants engage the market to take advantage of favorable lease terms. Concessions will begin to fade particularly as the development pipeline tapers off, sublease space is absorbed and the newest, most efficient space is leased. To put it succinctly, concessions are about as good as they are going to get, according to JLL’s first quarter office market insights.

“The story of the office market has been very consistent for the last several quarters: increasing vacancy, sublease space and concessions,” Beau Bellow, JLL senior vice president, office tenant representation, tells GlobeSt.com. “However, despite an uptick in vacancy and some new sublease space put on the market, concessions seem to be leveling off and a bit of cautious optimism has returned. Opportunities still abound for tenants in the market, but the level of concessions we have grown accustomed to won’t last forever.”

Despite the continued uptick in vacancy, lack of growth in asking rents and oversupply of sublease space across the market, there was one submarket that bucked each of the aforementioned trends. The Galleria was the only submarket in Houston to experience a decrease in vacancy, an increase in asking rents and a decrease in sublease space. Its net absorption is 138,679 square feet with a total vacancy of 20.3% and an average direct asking rent of $36.30. Additionally, leasing activity in the submarket improved by nearly 60% quarter-over-quarter, thanks to Apache’s 515,000-square-foot renewal at Post Oak Central and several full-floor deals.

Although there are signs of improving market conditions ahead as evidenced by strong performance in some areas in the first quarter, the Houston office market has a long way to go before it returns to a balanced market. As such, market conditions are expected to continue to favor tenants through the remainder of 2018 as leasing activity remains muted and the market absorbs the oversupply of space which has pushed vacancy from 14.9% in year-end 2014 to 23.8% in first quarter 2018.