INVENTORY ANALYSIS
Our Office Story measures the 12-month Downtown competitive leasing cycle
• A unique Downtown Houston survey that includes:
• All marketed space
• Large available blocks / full floors
• Tenants by industry
• Sublease space on the market and by tenant
• Multi-floor tenants
• Large transactions / tenants new to Downtown
• Operating expenses and property taxes by building
• Downtown’s largest tenants by industry and total amount of office space
• Surveyed buildings organized into three distinct Tiers to better understand patterns in Downtown’s top office towers including renovation and new construction
• Proprietary and longitudinal: Central Houston’s Office Story in its 40th year; started in 1985 by Stewart O. Robinson, President, SOR Real Estate Advisors, LLC
• Downtown Houston + Office Story
• Survey completed in May – June 2024 for all 2023 leasing activity
• Approximately 32.6 million SF
• 40 office buildings
• More than 2 million SF of Downtown leasing during 2023
• 61% of Downtown office inventory
• Each property was placed into a Tier on a caseby-case basis, but generally:
• Tier I space is top of the line, Class A properties
• Tier II space is lower Class A properties
• Tier III space is generally Class B properties
Surveyed Buildings
Buildings no longer included in Survey:
• 1111 Louisiana (CenterPoint Energy Plaza)
• 1600 Smith
• 440 Louisiana (Lyric Tower)
• 708 Main (Great Jones)
• 808 Travis (Esperson Building)
• 1010 Lamar • 1111 Fannin
Summary of Survey Data
Historical / Future Building Deliveries Timeline
2023 MARKET ANALYSIS
MARKETED SPACE
Marketed Space Overview
• Overall, the market for direct space loosened by 1 million square feet in 2023.
• There was less marketed sublease space compared to last year (613K square feet available in 2023 vs 734K square feet in 2022). 70% of this space is in Tier II.
• Tier Breakdown:
• Tier I: Market tightened by 78K square feet. Activity varied by building, and Tier I buildings saw relatively stable leasing trends.
• Tier II: Market loosened by 984K square feet, largely accounted for by activity in two buildings. Tier II experienced troubles retaining tenants.
• Tier III: Market loosened by 114K square feet. Activity saw more availability across most buildings.
• The 2.3% year-over-year increase in availability can be largely explained by LyondellBasell (366K SF) becoming available and Shell subleases (732K SF) expiring.
• These two leases account for 10% of all marketed space.
• Without these two losses, total space would have tightened by 78K square feet.
• Despite NRG staying Downtown, they reduced their footprint by approximately 42%.
Historical Direct Marketed Space
Covid-19 Pandemic Energy Commodity Price Crunch
Recession
Wreck’ + Enron Bankruptcy
Historical Sublease Full Floor Blocks
Full Floor Sublease Blocks
MARKETED SPACE
TAKEAWAYS
• Tier I sees continued success attracting tenants. While Tier II is responsible for most of the increase in availability, it is largely due to two buildings.
• The two buildings in Tier II account for over 1.1 million square feet of direct available space added from last year. Without these, total space would have tightened by 92K square feet.
• While there was moderate sublease activity, the decrease in sublease space was driven more by lease terms expiring and space shifting to being directly marketed.
2023 MARKET ANALYSIS
LEASING ANALYSIS
Leasing Analysis Overview
• Leasing activity decreased by 42% from last year (2.1M square feet of leasing activity). However, it exceeded 2021 levels.
• New leases signed are consistent with historical levels. A majority of the decrease in leasing activity is due to a decrease in renewals. Expansions decreased as well, but not to the same extent.
• There was a decrease in the proportion of leases signed over 20K square feet, with a continued increase in the proportion of leases from 5K – 20K square feet.
• Tier I saw a diverse range of activity, with the total SF of new leases signed higher than renewals. About half of total new lease activity originated from Tier I. Tier I also saw activity that skewed towards large transactions.
• Tier II saw muted expansion activity. New leases account for 50% of total Tier II leasing activity, while renewals account for 38% of activity.
• Tier III saw much of their leasing activity through renewals. Additionally, Tier III tends to attract tenants looking for less than 20K square feet of space.
1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000
Large Transactions
Activity by Tier
Leases by Size (Tier I)
Leases by Size (Tier II)
Leases by Size (Tier III)
LEASING ANALYSIS
TAKEAWAYS
• There has been a high level of renewal activity in the last several years, which is a function of when active leases are expiring.
• A decrease in renewal activity is due partly to companies opting out, but also due to the timing of the market.
• We are still seeing a healthy level of new leases signed with 65 in 2023, signifying a continued interest in companies moving or staying Downtown.
• Expansion activity has decreased due to a new hybrid work environment where tenants are opting for a lower footprint.
• New and expanded leases are at their highest combined percentage since 2017 (56% of total lease activity).
• The market is becoming more efficient and downsizing space when renewing, which is why we see a decrease in proportion of leases over 20K square feet, while seeing an increase in the proportion of leases from 5K – 20K square feet.
• A continued flight-to-quality trend is prevalent, where we are seeing a higher proportion of Tier I and Tier II leases vs Tier III.
• The diversity of activity in Tier I across all transaction sizes indicates a healthy market for trophy class office, likely due to tenants’ desire for better amenities.
2023 MARKET ANALYSIS
OCCUPIER ANALYSIS
Occupier Analysis
Overview
• FIRE and Legal tenants prefer Tier I space overall. These industries account for 57% of all occupied Tier I space.
• Energy tenants occupy a diverse range of building Tiers.
• While Downtown is still an energy-dominated market, it continues to diversify with other industries.
• New Downtown occupiers prefer Tier II space over Tier I.
Note: FIRE = Finance, Insurance, and Real Estate
Industry Occupancy by Tier (2022)
Industry Trends
Proportion of Total Space Occupied by Industry per Year
OCCUPIER ANALYSIS
TAKEAWAYS
• Occupancy of Tier I space increased proportionally across the board, signifying a continued prevalence of the flight-to-quality trend.
• The continued presence of energy tenants offers a glimmer of hope for Tier II buildings in Houston. These tenants include established Houston energy companies, energy firms relocating from other cities, and new startup ventures. Notably, energy tenants remain a major occupant of not just prime (Tier I) space, but also of Tier II and Tier III buildings.
• New to Downtown tenants favor Tier II space as Tier I space is more competitive, and Tier II space can offer a significant discount in rental rates compared to Tier I.
• There were 19 new companies to Downtown in 2023 that were not previously here before.
2023 MARKET ANALYSIS
OPERATING EXPENSES
OPERATING EXPENSES
TAKEAWAYS
• Our OpEx data gives insight as to why Tiers are structured the way they are:
• Tier I pays 41.2% of their OpEx towards property taxes, for Tiers II and III, this figure is 26.8% and 23.8%, respectively.
• Tier I routinely pays more property tax per SF than any other Tier.
2023 MARKET ANALYSIS
APPENDIX
Survey Background
• 40th year of survey providing unique insight on the current competitive office leasing environment based on analysis of primary data
• Results assist building owners, lease agents and investors in making informed business decisions
• Surveyed buildings have proven ability to compete for tenants in Downtown’s premier office buildings in the survey’s 3 tiers (I, II & III) and does not replace traditional market surveys such as broker, owner or third-party reports
Survey Definitions
• Office Inventory: Total office space in all Downtown buildings regardless of building class or survey tier.
• Survey Universe: Downtown’s premier office buildings classified as Tier I, II & III in this Report.
• Owner-Occupied: Buildings fully owned and/or occupied by the owner; includes Chevron’s 1500 Louisiana and 1400 Smith; Hilcorp’s 1111 Travis and Partnership Tower (701 Avenida De Las Americas).
• Energy: Exploration and production (E&P), pipeline, mining, utility, chemical and service providers.
• Legal: Law firms and legal service providers.
• FIRE: Finance, insurance and real estate.
• Other: Professional and business services, information technology, public administration, retail.
• Leased Space: All leased spaced regardless of occupancy status.
• Actively Marketed and/or Available Space: Marketed office space regardless of occupancy and lease status.
• Availability Rate: Direct space currently marketed divided by total amount of surveyed space.
• Leasing Activity: Signed leases during the survey year regardless of scheduled occupancy status and includes direct, sublease, renewals and pre-leasing activity.
• Absorption: Total annual survey change of square feet marketed regardless of occupancy.