HOUSTON—Texas' top-four office markets were off to a slow start this year, wrapping up what appears to be one of the worst quarters of the last five years. The 5.6 million square feet of inventory in fewer than 30 closed office deals across the top four markets was the lowest quarterly total since 2013, according to a study by CommercialCafe.
The office market had a total of 22 closed sales since the beginning of the year, totaling $504 million in sales volume for disclosed-price transactions and signaling a 63% decline year-over-year. Prices climbed to an average of $199 per square foot.
Of those 22 sales recorded, only 10 were disclosed-price transactions. Even though sales amassed in the remaining 12 deals would help paint a more favorable picture, overall office sales activity remained slower than usual, CommercialCafe points out.
Although the Houston office market has been struggling as a consequence of crude oil hovering at the $50 per barrel bull/bear line, it remains one of the best six markets for investment in 2018. Eight deals closed here during first quarter—half the number of sales that were recorded during the previous quarter. And the office market concluded the quarter with the highest dollar volume—a trend that is consistent among the top four Texas markets.
Assets sold in the Houston office market accounted for 80% of total first quarter Texas office sales—$343 million in disclosed-price transactions. The highest first quarter prices were recorded in the Houston office market, where assets traded at an average of $144 per square foot.
Not surprisingly, Space City was home to the largest sale of the quarter. Baupost Group and M-M Properties partnered up and paid $175 million for the 1.2 million-square-foot Marathon Oil Tower at 5555 San Felipe St. in Uptown. CBRE had previously acquired the tower in 2013 for $246 million and this was the third time the office property was on the market since 2015. Sold at 90% occupancy, roughly two-thirds of the property is leased to anchor tenant Marathon Oil through 2021.
The new owners plan to spend more than $25 million on upgrading the building's public spaces and garage, and adding a conference center and dining amenities. This transaction is further indication that investors believe the market has bottomed out and are anticipating a solid recovery during the next few years.
Other large transactions in the quarter included Loop Central One-Three, purchased by Hertz Investment Group in March for $72.3 million. The seller was TIER REIT. In February, Brookhollow I-III was purchased for $70.5 million by Sooner Management. The seller was Parmenter Realty Partners, research indicates.
“The Texas office markets are quite diverse. With the rebound of the energy industry, Houston posted positive gains in fourth quarter 2017,” Doug Ressler, director of business intelligence, Yardi-Matrix, tells GlobeSt.com. “However, Houston experienced mergers and consolidations in first quarter 2018, which negatively impacted their overall metrics. Most of the weather-damaged offices have been rehabbed and employment indicators show strong office growth for Houston in 2018.”
At the same time, developers were hard at work during the first quarter—nearly 4.8 million square feet of product were delivered in the Austin, Dallas-Fort Worth, Houston and San Antonio office markets. An additional 6.7 million square feet are on track for delivery in the second quarter.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
