Houston past the oil downturn, CBD continues to feel effects of energy moves

According to the Greater Houston Partnership, Houston has now turned the corner on the recent oil downturn, and has returned to growth in the energy sector.  However, this has not yet shown in downtown.  CBD Class A net absorption was again negative in the third quarter.  Negative net absorption was driven by two factors:  sublease space expiring and becoming vacant, and projected vacant space from previously announced energy moves hitting the market.  Shell’s lease expiring and vacating 910 Louisiana contributed over 125,000 sq. ft. of negative absorption to the CBD class A total.  Third quarter overall net absorption was -492,511 sq. ft., bringing the 2018 total to -1.7M sq. ft. of net absorption. While the Houston MSA again saw negative absorption, the third quarter was 234,000 sq. ft. less negative than the previous quarter.  The bright spots in the third quarter were in West Houston, with Katy Freeway and Energy Corridor submarkets contributing 133k sq. ft. of positive absorption as oil prices showed continued stability. 

Vacancy increases, total availability drops from Q2 as sublease space expires

Overall total availability dropped by 20 bps in the third quarter after reaching a peak of 23% in the previous quarter.  The concurrent increase in vacancy points to sublease terms expiring and becoming vacant rather than being absorbed.  Continued sublease space rolling vacant will likely drive down asking rents in the coming quarters, as landlords become motivated to fill vacant space.

Flight to quality continues

As sublease space continued to draw down and expire, the flight to quality continues in the major submarkets.  Class A properties recently delivered or renovated with modern amenities continued to outperform their less modern peers.  Several energy firms are in the process of moving from legacy class A leased space into single-tenant recently purchased buildings in West and Southwest Houston.  Occidental, Shell, and Schlumberger are a few of the names moving to company-owned properties.