The Houston office market has grappled with persistent challenges since the COVID-19 pandemic began, as reported in a Jan. 9 office market update from the Greater Houston Partnership. Highlights include a decrease in occupied space, increased availability of office space and the impact of the work-from-home trend.

The suburbs in Houston have emerged as a resilient and sought-after segment in the office space market, Winthrop Realty Group Principal Andrew Armour said.

As of Jan. 15, the Kastle System’s weekly Back to Work Barometer reports 58.7% of Houston office workers were working from the office, compared to:
  • 71.8% in the first quarter of 2023
  • 52% in the first quarter of 2022
  • 34.7% in the first quarter of 2021
Before the pandemic, suburban offices were already gaining popularity due to reduced commute times and focused work settings, Armour said.

“The proximity to upper-middle-income housing and the demand for quality spaces contributed to the attractiveness of suburban areas,” Armour said.

The vacancy rate for newer buildings completed in the past 15 years before the fourth quarter of 2023 averaged 17.3%, while the vacancy rate for older buildings completed before 2008 was 27.2%, according to the GHP report.

Patrick Jankowski, senior vice president of research for the GHP, predicts office leasing to “remain weak,” in 2024.

“The number of office lease transactions, encompassing various space deals, is trending down,” Jankowski said at the Dec. 7 Houston Region Economic Outlook. “This reflects a general slowdown in construction and leasing activities across different sectors of the real estate market."
The impact

In the Houston office market, there is a contrast between offices that are performing well and those facing challenges, Armour said.

Offices that are thriving include “trophy buildings,” premium spaces classified as the highest-tiered Class A structures, Armour said.

“The suburban offices, characterized by reduced commute times and dedicated environments, have garnered popularity among businesses, especially those looking for localized workspaces,” Armour said.

On the other hand, older buildings requiring longer commutes have encountered difficulties, contributing to increased vacancy rates in that segment, he said. The challenges faced by these offices are reflected in negative net absorption and higher availability rates.

The oversupply of office space coupled with the absence of rent growth has limited landlords' ability to increase rents, hindering office construction, Armour said. These offices have struggled with negative net absorption and stagnant rent growth since 2014.

The breakdown

Armour predicts, in 2024, the following developments will take place in the office space market:
  • Older buildings will be repositioned into smaller, more flexible office spaces.
  • The hybrid work model is anticipated to persist, with companies exploring alternative office solutions balancing flexibility and the need for physical spaces.
  • The suburban office market is expected to remain stronger than the urban markets.