Strong demand persists in newly delivered product

Houston, TX – Avison Young today released its Fourth Quarter 2024 Office Market Report for Houston. The office market experienced a setback in the fourth quarter of 2024, with total net absorption turning to negative 664,000 square feet (sf), erasing the gains in the prior quarter. While the overall market posted net occupancy losses of 171,000 sf in 2024, the trophy segment showed resilience with 811,000 sf of positive absorption.

Direct space availability has declined to 25.9% since hitting its peak of 26.9% in 2022. Newer office buildings built since 2010 continue to boast the lowest availability at 13.8%. However, supply constraints are beginning to arise for this high-end product. As these space constraints grow, future demand will likely be diverted to the next tier of buildings built in the 2000s and 2010s, or older buildings that have undergone extensive renovations. 

Houston’s office market has added 5.5 million sf of new product over the past five years, which has experienced robust leasing activity with 89.9% of this space already leased. Limited new space options in the market have resulted in a couple of new build-to-suit projects breaking ground over the past year, with pre-lease commitments in place.

“The constrained pipeline of office construction, coupled with robust leasing demand for newer, class A properties, has resulted in a limited availability of suitable spaces for larger tenants. Consequently, this limited supply and strong demand could incentivize the commencement of new office development projects, particularly among firms willing to pay a premium for modern, high-end office spaces,” said Principal and office tenant representation specialist Anthony Squillante.

Leasing velocity slowed considerably during the second half of 2024 after a strong start. This deceleration was driven by a confluence of factors, including heightened economic and political volatility, which fostered broader economic uncertainties and a cautious business sentiment. As a result, annual leasing volume experienced a year-over-year decline of 11.6% and remains 29.5% below the five-year leasing volume prior to the COVID-19 pandemic. A key contributing factor was a slowdown in large-scale leasing deals, as many companies had already finalized their long-term real estate strategies. However, the emergence of an uptick in expansion-related transactions signals a potential resurgence of leasing activity in the year ahead.

“Despite the decrease in leasing volume, the market is starting to witness an increase in more expansion-related transactions, primarily involving small- to medium-sized companies,” said Wade Bowlin, Principal and Managing Director of the firm’s Houston office.

In 2024, small- to mid-sized office lease transactions accounted for a larger share of the overall leasing activity. Small leases (under 10,000 sf) were particularly dominant, representing 43.2% of all leases, significantly exceeding the pre-pandemic average. In contrast, large lease transactions (over 100,000 sf) only made up 10% of the leasing activity in 2024, which is substantially lower than the 22.4% average observed from 2015 to 2019.

Houston's economy continues to demonstrate strength, with 62,500 jobs created over the past year. While job growth has slowed from recent highs to 1.8% year-over-year, it remains healthy as it settles into a more sustainable pattern of growth. Furthermore, the unemployment rate remains relatively low at 4.5%.