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Houston office market registers improvement

October 3, 2018

The amount of vacant office space across Houston dipped in the third quarter, ending a 14-quarter streak of rising vacancies in a market still struggling to recover from the energy slump.

Office space was 24.2 percent vacant areawide at the end of September, down from 24.5 percent in the previous quarter and 22.8 percent a year earlier, commercial real estate firm JLL said in a new quarterly report.

Leasing activity is picking up in parts of town beset with high sublease inventories left by oil and gas companies that emptied out millions of square feet of office space after the downturn began in 2014.

“Big-deal activity pretty much went away,” Russell Hodges, senior vice president with JLL’s agency leasing group, said.

In west Houston’s Energy Corridor, one of the hardest hit office markets, companies are again shopping for space, said Hodges, citing several new leases of at least 100,000 square feet each that are likely to close soon.

“Even if they don’t, it’s a good indicator of the activity that’s out there,” he said. “I think part of it has to do with more confidence in energy.”

Despite the improving factors, Houston landlords are still doling out concessions, and tenants generally have the upper hand when it comes to negotiating leases.

“Many more quarters of sustained growth are necessary before the market returns to a more balanced state,” according to the JLL report. The company said it expects market conditions to remain favorable for tenants well into 2019, at least.

Until the most recent quarter, the office vacancy had been rising each quarter since late 2014 when the rate was 13.4 percent.

The drop in vacancy in the third quarter stemmed from ConocoPhillips moving into its new 600,000-square-foot Houston headquarters at Energy Center 4 on the west side.

Despite the still-high overall rate, space is at more of a premium in some submarkets.

The Woodlands, for example, has a vacancy rate of 14.8 percent, according to the Houston office of NAI Partners, another commercial real estate firm.

In a sign of confidence, The Howard Hughes Corp. recently purchased two vacant office buildings The Woodlands for $53 million.

The 4- and 6-story buildings totaling 257,025 square feet of space came with additional land for the future development of another office building.

“The ability to purchase these buildings below replacement cost provides us with instant Class-A inventory at a lower cost, at a time when we are seeing significant demand for space,” Grant Herlitz, president of Dallas-based The Howard Hughes Corp., said last month in a statement.

Also in the third quarter, Hines broke ground on a new office tower at the site of the former Houston Chronicle building. The property, which will add more than 1 million square feet to the central core, has been more than 30 percent preleased to Vinson & Elkins and Hines.

In another positive sign, sublease space fell by more than 10 percent to 8.7 million square feet.

nancy.sarnoff@chron.com

twitter.com/nsarnoff

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