Houston’s Office Market Experiences a Rent Correction

by | 26 June 2015

In light of new market conditions

The impact of the energy downturn is shifting Houston’s office market to a tenant-favorable market primarily due to the large amount of sublease space hitting the market and the volume of new office construction reaching the point of delivery.

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I received a phone call recently from a prominent landlord representative in the Houston marketplace representing a trophy Class A building in the city. He was following up on a proposal for my client’s space requirement. The bad news for him was that I had to inform him that my client was pursuing another option.

This particular landlord representative is a consummate professional. So, naturally he thanked me for the opportunity to earn my client’s business. As any good landlord representative would do, he asked if there was anything he could do to get back in the hunt for my client’s requirement.

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The fact is that the building owner had made a very competitive and attractive proposal to my client. My client’s decision to pursue another opportunity wasn’t primarily based on the economics of the deal. So, when I informed him of this, his response was: “In light of new market conditions, if anything changes, I am certain the landlord will entertain significantly improving the leasing package on the table.”

Reality sets in

Those four words, “In light of new market conditions,” sum up the change in perspective from Houston office building owners over the past few months.

While Houston’s office market indicators have begun to reflect the dramatic drop in oil prices that occurred in Q4 2014, during the first quarter of this year, it’s taken a few months for the reality to set in for Houston office building owners: While market fundamentals are still relatively stable, leasing activity has dramatically slowed.

I suspect that, when the second quarter office market reports hit at the end of this month, average quoted rents will not look all that different than they did last quarter.

What has changed is the delta between quoted rents and strike prices and the depth of leasing concessions offered by Houston office owners — that is, free rent, tenant improvement allowances and abated parking charges.

Effective rents are where the rubber meets the road, and those look drastically different than they did 6 months ago for the Houston office market. For most Houston office tenants, particularly those larger than 10,000 square feet, it is a good time to be in the marketplace — in light of new market conditions, that is!

Coy Davidson is Senior Vice President of Colliers International in Houston. He publishes The Tenant Advisor blog.