1. “Houston has rapidly shifted
in tenant's favor as availability
expands and leasing dries up.”
Tim Wingfield,
Savills Studley Research
Savills Studley Report
Houston office sector Q2 2015
Savills Studley Research
Houston
SUMMARY
Market Highlights
OVERALL RENTS STAGNANT
Overall asking rent, $29.79, rose by 0.5%
for the quarter and by 7.3% for the year.
Class A asking rent, $36.13, posted a slight
quarterly decline of 0.3% but increased
annually by 2.7%.
QUARTERLY LEASING REMAINS DOWN
Overall leasing totaled 2.1 msf, up by 0.6%
for the quarter but down by 35.6% for the
year. On a trailing four-quarter basis, volume
attained 11.5 msf, dropping by 9.2% from
the prior quarter and by 21.6% from the
second quarter of 2014.
AVAILABILTY RATES INCREASE
The region’s overall availability rate (21.7%)
grew by 1.1 pp from last quarter and by 3.3
pp from last year. The Class A rate (22.7%)
jumped by 1.4 pp quarter-on-quarter and by
4.5 pp year-on-year.
2. 02
Savills Studley Report | Houston
The Houston Drought
In stark contrast to Houston’s torrential May
thunderstorms, leasing activity maintained
its drought into a second consecutive
quarter. Volume totaled 2.1 msf in the
second quarter, mirroring the 2.1 msf leased
in the first quarter but noticeably depressed
from 2012 through 2014’s quarterly average
of 3.7 msf. The primary culprit continued to
be uncertainty within the energy industry.
Oil and gas companies started to feel
comfortable with business operations
incorporating the new price of oil - which
hovered near $60 per barrel during May and
June - but, there was nothing to suggest
that office leasing will return to its previous
pace any time soon.
However, there is some consensus that
the energy industry will hold steady and
begin a slow recovery in 2016, which may
trickle down to office leasing in the long run.
Through the end of June, the total U.S. oil
and gas rig count fell for a 29th consecutive
week. Goldman Sachs predicted, though,
that U.S. producers will soon ramp up
activity because of their increasing comfort
with and adjusted expectations for the new
cost/revenue/funding mix. A significant
reduction in costs – which are down by
nearly 30% from a year ago due to layoffs,
closed wells and improved production
efficiency – should give producers added
room to slowly expand operations.
Notable exceptions to the leasing drought
dotted the landscape. Cousins Properties
mitigated its lease expiration exposure
by signing Transocean to a 255,413-sf
renewal at Four Greenway Plaza. In a deal
reminiscent of pre-2015 activity, Skanska
signed IHI E&C International to a 158,050-
sf lease in its new project, West Memorial
Place II. However, it was non-energy firms
that filled in some of the void. Stage Stores
announced the consolidation of a Meyerland
office and the company’s South Main
Street headquarters into a new 168,907-
sf Galleria-area lease at 2425 West Loop
South. Mattress Firm then followed suit,
announcing a consolidation from locations
at 5815 Gulf Freeway and 1775 Saint James
Place into Stage Stores’ current 123,836-sf
headquarters at 10201 South Main Street.
A secondary contributor to the leasing
drought was a lull in significant lease
expirations. In 2012 through 2014, many
major tenants got ahead of their lease
expirations through early renewals,
commitments to new development and
consolidation deals. Over the next 12 to 18
months, a return to historic levels of lease
expirations is expected.
Source: Bureau of Labor Statistics
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
0.48
0.50
0.52
0.54
0.56
0.58
0.60
0.62
0.64
0.66
Millions
Hou. Off. Emp. Hou - % Ann. Ch. Off. Emp. U.S. - % Ann. Ch. Off. Emp
Office-Using Employment Trends
$36.13
$28.96
$21.48
$18.71
$0
$5
$10
$15
$20
$25
$30
$35
$40
2015 2Q2014 2Q2013 2Q2012 2Q2011 2Q2010 2Q
($/sf) Rental Rate Trends
Class A Class B & C
Asking Rent Trends
22.7%
20.2%
20.5%
19.6%
0%
5%
10%
15%
20%
25%
2015 2Q2014 2Q2013 2Q2012 2Q2011 2Q2010 2Q
(%) Availability Rate Trends
Class A Class B & C
Availability Rate Trends
3. savills-studley.com/research 03
Q2 2015
Tenant Sq Feet Address Market Area
Transocean 255,413 4 Greenway Plz Greenway Plaza
Stage Stores 168,907 2425 W Loop S West Loop / Galleria
IHI E&C International Corporation 158,050 15377 Memorial Dr Katy Freeway
Mattress Firm 123,836 10201 S Main St Med Center / South
Veterans Evaluation Services 75,722 2707 N Loop W N Loop W / 290 Near
AXIP Energy Services 49,314 1301 McKinney St CBD
Zachry Engineering Corporation 48,408 3600 W Sam Houston Pky S Westchase
U.S. Physical Therapy 39,471 1300 W Sam Houston Pky S Westchase
J. Connor Consulting 32,066 19219 Katy Fwy Katy Freeway
CARBO Ceramics 27,259 575 N Dairy Ashford Katy Freeway
Sum of Top 10 Leases 978,446 Sum of 2nd Qtr Leasing Activity 2.1 MSF
A Cloudy Future
As Houston settles into the new norm of the
energy market, more uncertainty looms on
the horizon. One of the biggest mysteries
lies within office subleasing. The second
quarter ended with 7.4 msf of sublease
space available, up by 88% from 4.0 msf a
year ago as companies continued to unload
excess space. Notable spaces added in
the second quarter included ExxonMobil’s
198,256 sf at Eight Greenspoint
Plaza (asking just $4.00/rsf triple net),
ConocoPhillips’ 207,009 sf at Two Westlake
Park and Phillips 66’s 210,735 sf at Pinnacle
Westchase.
A second wave of newly available sublease
spaces may be forthcoming in the near
future. Several companies that laid off
employees in 2015 have yet to announce
available sublease space, including
Marathon (400 layoffs) and Apache (250
layoffs). Announced M&A activity, such as
Shell’s acquisition of BG Group and Noble
Energy’s acquisition of Rosetta Resources,
is likely to lead to further consolidation and
additional sublease space on the market.
Direct availabilities are expected to grow as
well. New starts dried up some time ago,
but ongoing construction has continued
to deliver in 2015. Enclave Place (300,907
sf available) and 3737 Buffalo Speedway
(284,700 sf available) are scheduled to
deliver in the third quarter, while larger
projects like 609 Main (1.1 msf available) and
Energy Center Five (524,448 sf available)
will hit the market in 2016. If a project like
609 Main manages to snag significant
pre-leasing, it will likely come through
cannibalizing one or more of the 1980s-era
Class A buildings downtown. Further,
tenants moving into new product are likely
to leave behind more than they take as
they capitalize on highly improved space
efficiencies and follow the densification trend
discussed below. In total, more than 8.5
msf of office space was under construction
to end the second quarter, and 49% of the
space was available for pre-leasing.
Lack of Demand and Deals
Despite the current leasing drought, there
is not a significant backlog of pent-up
demand in the market. Rather, many firms
with 2015 layoffs have yet to reduce their
space utilization. Many other companies
that avoided layoffs have still implemented
hiring freezes, stopping planned growth in its
tracks. Corporate America’s prevalent trend
toward densification continues its march in
Houston space programming. Energy’s old
standard floor plan was 69 closed offices
and 362 sf per employee, while today’s
new standard is 104 open workstations
and 201 sf per employee seat. Today’s
densified configurations provide abundant
collaboration to encourage interaction while
also supporting privacy when needed.
Due to few leases and insufficient comps
it is difficult to verify the hypothesis that
the spread between bid and ask rates has
grown. Compared to the previous quarter,
Houston’s overall asking rates increased by
0.5% while Class A rates declined by 0.3%.
As the leasing slump continues, we expect
to see more softening in rates and increases
in tenant improvement allowances, rent
abatement and other inducements.
The lack of demand for office space puts
companies negotiating leases during 2015
in a stronger position than those doing deals
in 2013 and 2014. This market presents a
growing number of opportunities for well-
positioned tenants to capitalize on a deal
by using their size, credit, flexibility and
other advantages. Although most landlords
have not lowered their quoted rates, they
are getting more aggressive with generous
up-front concessions. It is reasonable to
expect that a large credit tenant willing to
commit to a new long-term deal in a building
with significant vacancy could achieve a
lower starting rate, flatter rate structure, a
generous tenant improvement allowance
and significant rent abatement, relative to
similar deals done in 2013 and 2014.
Looking Forward
With Houston office availability having
already grown by 1.1 percentage points over
the past quarter and 3.3 percentage points
over the past year, we expect the market to
continue to shift in tenants’ favor. Continued
delivery of new supply, a new wave of
energy layoffs and additional sublease
listings will only add to tenants’ leverage
through the remainder of 2015.
Availability Rate Comparison Rental Rate Comparison
Major Transactions
$38.66
$36.04
$33.98
$33.15
$33.15
$32.96
$32.12
$31.94
$29.79
$26.26
$25.70
$24.80
$22.36
$22.14
$22.01
$19.66
$18.80
$17.59
$15.38
$35.49
$31.16
$27.73
$0 $5 $10 $15 $20 $25 $30 $35 $40
CBD
Greenway Plaza
W Loop/Galleria
US Index
Katy Freeway
Woodlands
Westchase
Midtown
Houston Region
Medical Center/S
Bellaire
Northwest/290 Far
Pasadena/Baytown
North Belt/Greenspoint
N LoopW/290 Nr
NASA/Clear Lake
SW/Sugarland
I-10/NE/Kingwd
FM 1960
New
Sublet
Existing Direct
($/sf)
Type
13.9%
14.8%
14.9%
16.7%
17.0%
17.8%
18.2%
19.2%
20.0%
20.0%
20.0%
20.2%
21.7%
21.9%
22.3%
27.3%
28.3%
29.3%
41.8%
0% 20% 40% 60%
I-10/NE/Kingwd
Pasadena/Baytown
CBD
Midtown
US Index
N LoopW/290 Nr
W Loop/Galleria
Woodlands
Greenway Plaza
SW/Sugarland
Westchase
Bellaire
Houston Region
Medical Center/S
NASA/Clear Lake
FM 1960
Northwest/290 Far
Katy Freeway
North Belt/Greenspoint
(%)
