Quarterly net absorption marks largest gain since 2018

Houston, TX – Avison Young today released its Third Quarter 2024 Office Market Report for Houston. Houston’s office market is showing promising signs of a recovery with 821,000 square feet (sf) of positive absorption in the third quarter, marking the largest quarterly gain in six years. Despite several large tenants reducing their footprints by an average of 34% over the past year, broad-based tenant demand has increased occupancy levels with 477,000 sf absorbed year-to-date.

The trophy office segment continues to outperform the market, with 848,000 sf of positive absorption year-to-date. Tenants are increasingly drawn to these high-quality buildings, which offer superior amenities and modern features in prime locations. However, these features are in short supply in the existing Houston market and within the next few years just 543,000 sf of new office space is under construction and slated for delivery, causing strong demand for the limited options available.

“The decrease in availability derived from limited new construction paired with a spike in leasing demand for premium spaces could lead to a reduction in concessions for tenants evaluating space in trophy and Class A-plus buildings,” said Principal and office tenant representation specialist Anthony Squillante.

In the third quarter, leasing activity totaled 2.1 million sf, well below the 5-year pre-Covid leasing average of 4.23 million sf. The slower pace is likely influenced by a challenging debt and liquidity environment for building owners, which has hindered larger deals from occurring as easily with their lenders, and the adoption of hybrid and remote work.

“While landlords are eager to make deals, some are finding it tough to provide tenant incentives such as improvement packages and rent abatements due to underlying building loans or financial constraints,” said Wade Bowlin, Principal and Managing Director of the firm’s Houston office.

A decline in office property values has created opportunities for investors, but the elevated interest rate environment poses significant challenges. Increased borrowing costs have led to a substantial discount in office asset prices, making it difficult to justify investments for some. As a result, office assets are selling at a significant discount compared to pre-interest rate hike levels. This downward pressure on property values has pushed the average price to $81 per sf. However, the Federal Reserve’s additional expected rate cuts offer a glimmer of hope. As borrowing costs decrease and bond yields fall, commercial real estate investment activity and asset values are expected to rebound, presenting potential opportunities for those willing to navigate the current market conditions.