Three Things to Know About the State of the Houston Office Real Estate Sector
The current office market in Houston can be characterized by one dubious distinction – having the most vacancy of any major office market in the country. As companies continue to shed office space, market-wide space availability (which includes present, sublease and future vacancy) is hovering around 30 percent. As a result of the pandemic, corporate institutions, law firms and large accounting firms, industries that lease a majority of office space, are reducing their office footprint. Overall, these changes to the workplace could have a lasting impact on future development, space design and capitalization of office buildings in a post-pandemic world.
Flexible workspaces are on the rise
As virtual network technology has been widely adopted over the last year, companies are considering all aspects of their workplace, including cost, convenience and maintaining the organization’s culture. Businesses that do not depend on an office-based workforce have been exploring flexible work options and the lockdown mandates at the height of the pandemic accelerated this trend out of necessity. As a result, there is growing pressure for employers to offer remote work options. With changing expectations of employees, employers are now expected to offer location flexibility and provide a more balanced personal life. Consequently, flexible work schedules could partially replace a showcase office as a means of recruiting talent.
An alternative investment for companies could be coworking memberships. The coworking space sector had its share of challenges navigating COVID-19, and like the rest of the office industry, is still recovering. As some companies have chosen to work 100 percent remote, there will inevitably be a need for neutral space with flexible layouts and no long-term commitment.
A modern shift in office demand
There is an apparent shift from traditional, single-purpose office buildings to modern lifestyle offices in a mixed-use environment. While corporate complexes across all classes and submarkets seem desolate, most of the permanent occupancy loss is taking place in older buildings. A phrase frequently repeated, even before the pandemic, is “flight to quality,” which we will continue to see among office tenants.
Overall, as general office demand recedes, what is left out to dry are older buildings that struggle to keep up with modern workplace demands. Original 1970s-80s built Class B and C office buildings have been slowly trending toward functional obsolescence, but like many other trends, the effects of COVID-19 have accelerated the process. In distressed submarkets, obsolete office space without an improvement budget should be removed from the equation altogether. With energy and maintenance efficiencies and more functional floor plans in the newer office buildings, the cost-benefit of leasing older office products is diminishing. The leasing expense difference between new buildings and existing ones has decreased, leading tenants to increasingly favor new and best-in-class options.
The future of office real estate in Houston
There is no doubt that the pandemic changed the way we live and work. While those at the executive level still tend to use the corporate office as a hub, many employees prefer remote or hybrid work. As a result, there is a diminishing overall occupancy and a shrinking average tenant size. While the overall amount of office space needed is decreasing, the amount of square footage per person is increasing due to social distancing. Additionally, the open-concept approach that was on the rise isn’t as popular now, and there is a growing design trend toward more private offices and taller cubicles. The majority of local businesses have either returned to the office or have plans to return soon, but remain adaptable as the fate of the pandemic is still uncertain.
Despite a lingering pandemic and fundamental uncertainty in the Houston energy industry, the overall sentiment and outlook is that the worst is behind us. Significant regional population growth is also a sign that employment in the Houston area could rebound more quickly than most major markets. Glimmers of hope continue to appear as many companies have prospered and opportunities have resurfaced amid the pandemic.
Lee & Associates - Houston is a fully-integrated, commercial real estate company. Our business-minded brokers specialize in office, industrial and land real estate investments. As the fastest-growing, broker-owned firm in the nation, we are uniquely qualified to support our clients’ needs in the local, national and international markets. To learn more visit www.lee-associates.com/houston.
Travis Taylor is a principal at Lee & Associates – Houston with a specialization in tenant representation. His background is focused in real estate leasing, finance and sales management, which provides him with a greater understanding of completing real estate transactions. Travis’ work ethic, diligence and experience in customer service and continual pursuit of customer satisfaction lay as his foundation in maintaining strong business relationships.