Often when we talk about the office space market we group classes together. And of course we all know that the classes, especially between A and B are subjective – there is an A that should be a solid B, or a B that should be an A. But more often than not, the market conditions and economics are not shared across the classes. With this in mind I thought I’d delve into the Houston market data of the last 5 years to see if any patterns of recession and recovery are illustrate clearly across office classes.
For class A space I found that leasing activity bottomed out around Q4 2008 and regular absorption returned a little over a year later at Q1 2010. The impact of the recession was minimal and short lived. Houston is fairly fortunate here because of our economic engines are driven by oil and gas and health care. Some major cities (mostly financial cities) had credit tenants dropping like flies, and their class A health suffered as a result.
For class B space leasing activity actually stayed fairly flat – so deal velocity never seemed to be affected much by the recession. That could have been a result of class A tenants seeking cost savings by moving down a class. Also class C tenants take advantage of value during down cycles in real estate, moving up class – and a combination of both is also a possibility. However, note the deep drop in absorption of class B space. Like A space, Q1 2010 class B space began to turn around – but just two quarters ago there was negative absorption. Class B recovery is mild. That said – continued positive job news in Houston will drive class B absorption in the coming quarters.
Class C space actually reflects an inverse trend to the recession. As the recession was at its peak in Houston, class C space was at its highest demand (most leasing activity of the last 5 years). However, even with so much leasing activity, class C space also suffered from negative absorption, and did not significantly fill vacant space during the recession. This segment is still vacillating between positive and negative net absorption. This isn’t so unusual. When times are good there are reasons why tenants will move into and out of C space. When times are bad there are cost savings reasons why people move into C space, and businesses that move out are often out of business. So fluctuations in C space are normal, and the bigger picture is often reflected in A and B space as well as employment growth or other broad indicators.
All in all, this paints a great picture for Houston moving forward. Previous investigation into office employment and absorption show a Houston that has a healthy office market again. I am still predicting single digit vacancy by late 2012 – so long as our economic progress isn’t stalled by Congress or other global factors like Europe.Source of data: CoStar Group