New Construction and Rehabs Outperform in the Houston CBD
Building off the momentum established in the third and fourth quarters of last year, the office market kicked off the year on a positive note, according to a JLL first quarter office report.
HOUSTON—Building off the momentum established in the third and fourth quarters of last year, the office market kicked off the year on a positive note, according to a JLL first quarter office report. Notably, both the supply and demand sides of the market showed signs of improvement during the quarter.
Since peaking at 24.5% in the second quarter of 2018, total vacancy has fallen in each of the past three quarters. For the third time in the last four quarters, no new deliveries were completed, which helped push vacancy down by 30 basis points to 23.1%. On the demand side, net absorption remained positive for the third consecutive quarter, totaling slightly more than 600,000 square feet.
“Vacancy is down and net absorption is up for the third quarter in a row–that’s good news for the office market,” JLL’s Beau Bellow tells GlobeSt.com. “We are also seeing other positive indicators such as rental rate growth, but despite these trends, the market remains tenant-favorable.”
Once a drag on the market, the Katy Freeway West submarket led all submarkets in terms of positive net absorption in the first quarter. This submarket, with more than 180,000 square feet of net move-ins, fueled net absorption in the first quarter. However, undoing a three-and-a-half year stretch in which total vacancy increased by 1,100 basis points, net absorption was negative in 14 consecutive quarters. And, the market delivered more than 14 million square feet of new construction, which will take many more quarters of sustained growth.
Another emerging trend shaping the Houston market is the outperformance of new construction and renovation efforts, particularly in the CBD submarket. This trend is best highlighted by the dramatic uptick in leasing activity at Houston Center, where activity jumped 285% quarter-over-quarter following the announcement of extensive renovation plans in the first quarter. Activity totaled 165,000 square feet in the quarter, already surpassing last year’s total of 133,000 square feet, according to the report.
In many ways, the market’s performance in the first quarter was a holdover from the second half of last year. Headline indicators such as total vacancy, net absorption and rental rate growth extended improving market condition streaks for the third consecutive quarter. Consistent job growth and a return of tenant demand are driving this turnaround in fundamentals, both of which were missing from the market in the previous three years. As such, market conditions are expected to favor tenants in the near term as the market continues its recovery but returns to a more balanced state in the coming years, JLL predicts.