Office vacancy rates rose from 15% before the pandemic to around 20% throughout the shutdowns and reopenings in the Cy-Fair area, according to data provided by Caldwell Cos. By comparison, retail and industrial vacancy rates were about 5% and 8% locally at the start of this year.
Griff Bandy, a partner with commercial real estate firm NAI Partners, explained office vacancy before the pandemic can largely be attributed to a soft energy industry, which only worsened when the pandemic hit and people started working from home more.
“[The] reason for uptick in vacancy in our estimation was an energy industry that had not yet recovered coupled with the push for more ‘work from home’ during the COVID[-19] pandemic,” Bandy said. “Many companies with leases that expired over the last couple of years have downsized, done shorter-term lease extensions or elected to change their office use they once had pre-pandemic.”
NAI Partners reported in the fourth quarter of 2021 the overall office vacancy rate in Houston was 25%.
While rent per square foot increased from $29.26 in the third quarter to $29.32 in the fourth quarter, the average rent is still $0.55 short of what it was in 2020 across the Greater Houston area. In Cy-Fair, rental rates continually dropped throughout 2021. According to Caldwell Cos., office rent per square foot had fallen to $17.01 by the end of the year. Despite declines in rent and climbing vacancy rates, NAI Partners officials said the pandemic does not seem to be as great of an obstacle to the market as it was a year ago. However, experts in the report said significant growth may still be out of reach for the next couple of years.
According to Bandy, the drop in rent prices is one of the concessions landlords are making to attract good tenants and renew contracts. While these concessions are feasible for some, those who cannot afford to make them may ultimately repurpose their buildings, he said.
“Those in the desirable locations should fare well and bounce back eventually with increased occupancy,” Bandy said. “For those buildings in less desirable areas—those buildings may go through a repurposing to how those buildings are used going forward. Repurposing could include storage uses, converting to residential uses and being sold for redevelopment.” Alternative spaces
While office spaces adapt to the changes in the market, small businesses are more frequently buying office condo space in Cy-Fair because it can be more cost efficient for their operations, according to Mike Evenson, founder and CEO of Lone Star Office Condos.
He explained that since the pandemic, he has seen an increase in demand for these office spaces because of the convenience they offer. For employees, there is the appeal of in-unit heating and cooling systems, and customers can access a business more directly.
These smaller office spaces are also popping up intending to draw in customers who want to set up satellite offices for their employees, Evenson said.
“From my perspective on the office condo development, it’s going to increase because communities, very big ones, are moving out to Fulshear past Katy,” he said. “And they’re going to be having rooftops going up, you know, thousands of them, and there’s going to be a need for this type of office product.”
The growth of the office condo market has seemingly been unharmed by the pandemic, according to Evenson, which is in stark contrast with corporate spaces.
“If their offices are 2,000 square feet, they’d have to buy an acre, put detention on it, and they’d have to maintain it. It would be cost prohibitive to them,” Evenson said. “Where here they can just buy 2,000 square feet, and everything else is left up to the association, the maintenance and all that, so all they need to do is concentrate on their business and let the association take care of the common area.”
In all, Evenson and Bandy said they have found the need for office space is not going away anytime soon. Large office buildings will begin to fill once people start going back to work in person, and small businesses will continue to seek out smaller office spaces to meet their customers more directly.
“From what we hear from our clients and what we see in the market, office space is not going away, ... but how it’s used by many companies going forward will be different than it has been used in the past 20 years,” Bandy said.
