March, 2006

The Houston office market consists of approximately 176 million RSF (Rentable Square Feet) of office space, including 79 million RSF of Class A space and 72 million RSF of Class B space in over 1444 buildings.

Rental Rates and Occupancy – Stable and Recovering
Overall, the Houston office market occupancy rate (83.4%) is recovering from a rapid decline that began in late 2001.  Houston has weathered a glut of new deliveries and managed to sustain relatively steady average annual rental rates.  Houston’s annual average quoted rental rates have risen slightly through the end of 2005 and into 2006.  The average quoted rental rate within the Class A sector stands at $20.37.  The average quoted asking rental rate in Houston’s CBD was $20.05 at the end of the 4th Quarter 2005, and $17.29 in the suburban markets.

Class A, B and C markets posted vacancy rates of 16.5%, 16.8% and 16.2% respectively.  Leasing activity increased considerably in 2005 and continues to increase in 2006 as the Houston economy continues to grow. During the last twelve months, Houston has added 75,000 jobs. The energy sector that contributes significantly to Houston’s economy also continues to show signs of growth. The active drilling rig count is up 14.5% from last year and is at the highest level in twenty years. Capital spending is up at the major energy companies with a presence in Houston as BP, Exxon Mobil, Shell, Chevron and Conoco/Phillips have all announced capital spending budget increases ranging from 8% to 52% over 2005 levels.

Net Absorption – Positive
Absorption has been steadily increasing and has consistently been in the top three (3) nationally over the past several years.  The Houston office market absorbed approximately 955,743 RSF of office space in 2005.  In 2005, the Class A office market absorbed 169,063 RSF of office space and the Class B submarket absorbed 466,168 RSF of office space. 

New Construction
With the exception of 2001, the construction boom that began in late 1997 continued to bring new space to the market at a considerable pace until 2004.  The surplus of new space hindered occupancy and rental rates, but the rate of excess supply has dwindled, allowing demand for existing space to catch up.

The majority of the recent new construction has been in the medical and build to suit  sectors, although several new office buildings have been announced for possible 2006 starts. Opus is underway with a new building for Mustang Engineering in the Energy Corridor and Granite Properties has announced plans for new projects in Westchase and Sugar Land.