“The stabilization of oil prices, OPEC accords and a very supportive Administration in the nation’s capital should portend well for Houston in 2017. Nevertheless, it will take some time for these positive turns to change the reality of oversupply in local energy and office markets.” Tim Wingfield, Savills Studley Research Savills Studley Report Houston office sector Q4 2016 Savills Studley Research Houston SUMMARY Market Highlights LEASING VOLUME WELL BELOW NORM Tenants leased 2.4 msf in the final quarter of the year, 28.3% below the historical quarterly leasing average of 3.3 msf. AVAILABILITY RATE RISES The market’s availability rate inched up just 25 basis points higher from 26.6% to 26.9%, but spiked by 362 basis points from year-end 2015. In contrast, the Class A rate fell by 70 basis points to 29.3%. Nevertheless, the Class A rate has soared by 550 basis points year-on-year. OVERALL RENT CONTINUES DECLINE Average asking rent posted a 3.0% quarter- on-quarter decrease to $28.09, the third straight quarter-on-quarter decrease. The Class A rate dropped by 3.9% to $32.73, and has plummeted by 6.0% year-on-year. SALES DOWN SHARPLY FROM A YEAR AGO Sales this year struggled to keep pace with the 2015 tally. As of November year-to-date office sales totaled $1.1 billion, a 53.4% decrease from the $2.4 billion in the first 10 months of 2015.
SUMMARYMarket HighlightsLEASING VOLUME WELL BELOW NORM
Tenants leased 2.4 msf in the final quarter of the year, 28.3% below the historical quarterly leasing average of 3.3 msf.
AVAILABILITY RATE RISES
The market’s availability rate inched up just 25 basis points higher from 26.6% to 26.9%, but spiked by 362 basis points from year-end 2015. In contrast, the Class A rate fell by 70 basis points to 29.3%. Nevertheless, the Class A rate has soared by 550 basis points year-on-year.
OVERALL RENT CONTINUES DECLINE
Average asking rent posted a 3.0% quarter-on-quarter decrease to $28.09, the third straight quarter-on-quarter decrease. The Class A rate dropped by 3.9% to $32.73, and has plummeted by 6.0% year-on-year.
SALES DOWN SHARPLY FROM A YEAR AGO
Sales this year struggled to keep pace with the 2015 tally. As of November year-to-date office sales totaled $1.1 billion, a 53.4% decrease from the $2.4 billion in the first 10 months of 2015.
02
Savills Studley Report | Houston
A FLAT MARKET REACHES FOR HOPE
One way Houston landlords and tenants keep a keen eye on energy employment is by tracking the price of oil. After bottoming out at $26.19 per barrel in early February, the metric ended 2016 at $53.75 per barrel. Many in Houston are hoping that global crude production cuts and increased Chinese demand will continue to drive up the price of oil and, subsequently, Houston employment and office leasing throughout 2017. Two other economic indicators appear optimistic as the North American rig count has trended upward since May and the Purchasing Manager Index has done the same since June.
The University of Houston Institute for Regional Forecasting sees the recent movement in oil markets move as a rebalancing that should settle with prices holding in the $50.00 to $55.00 per barrel range. While there’s no guarantee of continued improvement in the near-term future, prices at $65.00 per barrel would “assure a healthy and moderately-growing North American fracking industry” that is critical to future Houston economic success. Given the end of the recent petrochemical boom that carried the Houston economy in recent years, the city as a whole could use an energy recovery on the higher side of most projections. The Greater Houston Partnership forecasts Houston economic growth at 29,700 total jobs created in 2017, which pales in comparison to the 63,500 averaged annually from 2004 through 2014, but would be an improvement from 37,200 jobs added in 2014 and 2015 combined.
Weak Ending To The Year
Amidst subdued hope for a vibrant 2017 recovery, the Houston office sector fell flat to end 2016. The market’s availability rate increased 0.2 percentage points quarter-on-quarter and 3.7 percentage points year-on-year to 26.9%. In the Class A sector, availability actually decreased 0.7 percentage points, driven exclusively by ConocoPhillips pulling the entirety of Energy Center Four off the sublease market. In November, Houston-based ConocoPhillips announced the relocation of its Houston headquarters to the 597,629-sf tower built in 2015. ConocoPhillips will occupy the space in mid-2018 after the build out of the shell space. Plans for the company’s current 1.4 million square foot corporate headquarters at 600 North Dairy Ashford were not disclosed.
Source: Bureau of Labor Statistics
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-9.0%
-7.0%
-5.0%
-3.0%
-1.0%
1.0%
3.0%
5.0%
7.0%
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80Millions
Hou. Off. Emp. Hou - % Ann. Ch. Off. Emp. U.S. - % Ann. Ch. Off. Emp
Office-Using Employment Trends
$32.73$29.19
$21.69$18.45
$0
$5
$10
$15
$20
$25
$30
$35
$40
4Q16 4Q15 4Q14 4Q13 4Q12 4Q11
($/sf) Rental Rate Trends
Class A Class B & C
Asking Rent Trends
29.3%
15.4%
24.0%19.6%
0%
5%
10%
15%
20%
25%
30%
35%
4Q16 4Q15 4Q14 4Q13 4Q12 4Q11
(%) Availability Rate Trends
Class A Class B & C
Availability Rate Trends
savills-studley.com/research 03
Q4 2016
Tenant Sq Feet Address Market AreaHP 378,000 Springwoods Village Pky The WoodlandsIndigo Minerals & M3 Midstream 67,710 600 Travis St CBDABM Industries 62,457 14141 Southwest Fwy Southwest/Sugar LandThompson & Knight 60,655 811 Main St CBDWebber 46,614 1725 Hughes Landing Blvd The WoodlandsVantiv 41,046 11410 Greens Crossing Blvd North Belt/GreenspointDisa Global Solutions 34,865 10900 Corporate Centre Dr Northwest/290 FarCommunity Health Choice 32,835 10900 Corporate Centre Dr Northwest/290 FarConvergent Outsourcing 32,835 10900 Corporate Centre Dr Northwest/290 FarBrock Services 27,860 10343 Sam Houston Park Dr Northwest/290 FarSum of Top 10 Leases 784,877 Sum of 4th Qtr Leasing Activity 2.4 MSF
Springwoods Village Shines
The Woodlands submarket saw notable deals signed in the last quarter of 2016. Webber took 46,614 square feet at 1725 Hughes Landing while Jones & Carter inked 26,554 square feet at Sierra Pines II. However, the largest transaction took place in Springwoods Village where HP preleased 378,000 square feet late in December. Construction on the two-building campus will begin in early 2017 and deliver in the second half of 2018. HP’s new campus will house about 2,400 employees. Nearby, American Bureau of Shipping previously signed on for 326,800 square feet in the second quarter of 2016. The establishment of ExxonMobil’s recent mega-campus and Southwestern Energy’s new headquarters rounds out the corporate destination northwest of the intersection of the North Freeway and the Grand Parkway.
Non-Traditional Leasing Drives The Market
Of the top ten leases this quarter, only the 67,710-sf extension and expansion for Indigo Minerals and M3 Midstream at JPMorgan Chase Tower represented leasing activity from an energy tenant. Deal volume included energy (the two above-mentioned Momentum Energy Group subsidiaries), technology (HP), facilities management (ABM Industries) and attorneys at law (Thompson & Knight), among others.
Of the quarter’s ten largest deals, two tenants inked notable downtown transactions this quarter. (The CBD should be on the outlook for a large deal in early 2017, as Bank of America is rumored to be in lease negotiations with Skanska to take 285,000 square feet in the proposed Capitol Tower development. Such a deal would consolidate their current 185,000-sf office space in Bank of America Center, which expires in late 2019, with other offices.) Seven of the deals hailed from northern and northwestern submarkets. After inking Alert Logic in the third quarter, the West Loop area was relatively quiet. Numerous large direct and sublease available blocks in the Katy Freeway and Westchase submarkets failed to attract tenants to sign at the dotted line in the last quarter of 2016. The Class A availability rates for those two submarkets were 40.7% and 32.5%, respectively.
Rents Continue To Tumble
Class A Houston asking rents sank 3.9% in the fourth quarter to $32.73. Class A rent is down 5.7% year-on-year; however,
the gap between ask and take rents was still significantly larger than the historical average. The differences between submarkets varied wildly. Class A rent in Westchase descended by 6.0% to $32.50, whereas the CBD’s Class A asking rate actually rose 1.6% to $41.89.
Looking Forward
The market is expected to stabilize in 2017, with a moderate improvement at best in hiring activity next year. Businesses in Houston will keep an eye on the first 100 days of the new Administration. Optimism regarding the potential for “pro-growth” legislation such as a major infrastructure bill or reduced banking regulation has some market observers predicting a boost in economic growth next year. This optimistic perspective depends on Congress reaching agreement on legislation. Even then it would take until late 2017 for any material impact to emerge.
The energy sector would seem to be one of the winners from the unexpected victory by President-Elect Trump. The new Administration seems likely to support reduced regulation of oil and gas exploration. Development of the Keystone Pipeline and unfettered oil and gas drilling would be a boon for supporting oil and gas field services. Despite the optimism about a pro-energy agenda, this will not remedy the fundamental issue of an oversupplied oil and gas dynamic.
N Loop W / 290 NearNorth Belt / GreenspointSouthwest / Sugar Land
Pasadena / BaytownI-10 / NE / Kingwood
NASA / Clear LakeFM 1960
NewExisting Direct
Sublet
($/sf)
Type
14.9%
16.1%
16.4%
16.5%
17.1%
17.2%
17.6%
17.6%
18.3%
22.5%
24.1%
24.8%
25.0%
26.9%
27.9%
30.8%
31.3%
37.3%
55.4%
10% 20% 30% 40% 50% 60%
Pasadena / Baytown
Greenway Plaza
N Loop W / 290 Near
Bellaire
US Index
I-10 / NE / Kingwood
Medical Center / South
Midtown
Southwest / Sugar Land
West Loop / Galleria
CBD
FM 1960
Woodlands
Houston Region
Westchase
NASA / Clear Lake
Northwest / 290 Far
Katy Freeway
North Belt / Greenspoint
Savills Studley Report | Houston
04 @SavillsStudleywww.savills-studley.com
Please contact us for further information
(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.
