- Jan. 16, 2020
-- If you asked most experts if Houston's stagnant office market is a result of supply or demand, most would say demand, due to five years of lower oil prices. Looking at the numbers over the past five years, and trying to determine whether Houston office market woes have been more supply or demand-driven, most would be surprised by what the numbers tell us. The market sentiment "feels" like there's been a severe contraction on the demand side. However, Houston office tenants are still occupying more space than they were in 2015, a nominal 2% increase; it's still an increase nonetheless.
However, when oil retreated in late 2014, new construction still continued and the effects of that additional space have been as much of a detractor to a healthy office market than the demand issues. At the peak of the office market from 2011-2014, 14.2M SF of new inventory delivered. Since 2015, there's been an additional 23.1M SF delivered and currently there is another 3.6M SF under construction. Houston's office market added more inventory during the contraction phase of the cycle than the expansion phase. Most of this is caused by the "flight to quality" trend of new tenants' demand for new Class A+ projects in order to attract and retain talent. While reduced footprints have been prevalent, tenants have also shown an appetite to move into a newer project that garners a higher rate than the one they're vacating. The "pre-lease" effect sees a building break ground on a new building that is only 40-50% pre-leased, leaving an additional 50% vacancy to hit the ground in a market that is already struggling. This has had a pronounced negative effect on the fundamentals.
For example, a tenant signs a 250,000 SF pre-lease in a 400,000 SF proposed project. The tenant's current footprint is... To read the full report, click here: https://www2.colliers.com/en/Research/Houston/Q4-2019-Houston-Office