Houston’s office market is improving and the industrial and retail sectors continue to charge forward, according to a quarterly update from commercial real estate services firm NAI Partners.
Brokers at the company’s Galleria area office shared insights on the market at a quarterly press update Wednesday. Some takeaways:
OFFICE
The office market is still in a slump — roughly 60 million square feet of office space throughout the metro area lies fallow.
And while some statistics suggest rents have risen, Dan Boyles, an NAI tenant representative, said those numbers are deceptive.
“The rents that are going up are really gross rents, they’re not net effective rents, which are still under significant pressure,” he explained. In other words, landlords are offering such large concessions that the actual rent received over the term of the lease remains low. Boyles said he is seeing significant concessions in both new buildings and older, lower-quality buildings.
While it’s still a tenant’s market, Boyles said leasing activity has taken more space off the market over the past few quarters, referred to as positive absorption. For the first time in a long time, some NAI clients are discussing expanding their office space requirements. In the first quarter of 2019, the Houston market absorbed half a million square feet.
“Which is marginal,” Boyles said. “But better than the other way around.”
INDUSTRIAL
Houston has historically been more of a manufacturing-based industrial market, but it’s shifting to a distribution market.
Million-square-foot spec warehouses are coming, said Clay Pritchett, a partner in the industrial and land brokerage services practice at NAI.
Spec warehouses used to be 200,000 to 300,000 square feet. Now they’re 600,000 to 800,000 square feet. Breaking the 1 million-square-foot mark would put Houston in the league of distribution markets such as Dallas-Fort Worth, Chicago and the Inland Empire in Southern California.
RETAIL
Mixed-use is becoming a bigger component of retail.
“There’s a big flight to urbanization,” said Jason Gaines, senior vice president, retail services at NAI Partners.
Investors are interested in re-purposing empty big-box stores into last-mile distribution centers. In a 350-foot depth building, a developer might put anchor tenants in the front 250 feet and transform the back into a logistics point.
That type of use hasn’t yet arrived in Houston, but these types of creative conversions are happening in places with more inventory of space such as the Midwest, Gaines said.
Houston’s retail has remained fairly full, with occupancy at or above 94 percent during the last five years.
“The developers have learned to self-police this industry,” Gaines said. “They’re not building a lot of specs anymore.”
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