Throughout the Houston office market’s recovery following the 2014 oil crash, downtown’s occupancy and rent rates have been a bellwether for leasing activity among energy companies. Countless companies, most of which are tied to energy, have either vacated downtown or reduced their footprints in recent years.
Because of the uncertainty in the downtown market and the subsequent drops in rent, downtown office landlords are making around half the profits from rent compared to 2014, according to a report from Savills Studley.
Downtown Houston office landlords are profiting around $10.79 per square foot, down 2.4 percent from 2016, per the report. In 2014, downtown Houston’s office landlords profited just over $20 per square foot. Following the housing crisis of 2008, landlords profited around $14 per square foot.
“Landlords are doing worse in Houston than other markets because the world economy is up, the stock market is up, things are great in the U.S., unemployment is down but the energy sector is still in deep recovery mode,” said Drew Morris, executive vice president and branch manager of Savills Studley’s Houston office.
Savills Studley’s report tracked three stats: landlord’s effective rent (how much landlords profit per square foot), tenant’s effective rent (how much tenants actually wind up paying after concessions and free rent is taken into account) and tenant’s negotiated rent (the rent often made publicly in available to downtown’s prospective tenants).
The average effective rent for downtown office buildings is currently $45.15 per square foot, per the report, which is up 3.4 percent from 2016. After free rent and other concessions are taken into account, downtown Houston’s office tenants only wind up paying $31.04 per square foot on a 12-month basis – just a 0.1 percent change from 2016.
Concessions increased fairly dramatically in downtown Houston in 2017. The average downtown landlord offered $71.00 per square foot in tenant improvement allowances and $108.00 per square foot in free rent savings. (That’s not to say that tenants saved $108.00 per square foot per month in free rent – that figure represents annual savings.)
For most businesses, having their profits cut in half would put them out of business. That isn’t the case for downtown landlords, Morris said.
“I’m not landlord … but, to me, that means stability,” Morris said about the value of profiting $10 per square foot on a downtown office building. “You’re covering your debt service, you’re not having to raise new equity, the building (isn’t) performing at a high level, but it sustainable.”
The largest block of Houston office space available for direct lease is in downtown Houston, in the 800 Bell property. The 1.3 million-square-foot building has been vacant since 2015 when Exxon Mobil Corp. (NYSE: XOM) exited and relocated employees to its new campus in Springwoods Village.
Meanwhile, a brand new building in downtown Houston has had healthy leasing activity. Hines’ 609 Main at Texas, a more than 1 million-square-foot tower that delivered in 2017, has 420,286 square feet available for office tenants, according to Colvill Office Properties, which markets the building for Hines.