One of the most controversial cities in 2023 is Houston. While the Lone Star staple has witnessed booming success along with other Texan cities, the CRE industry was hit hard from the pandemic. The glaring effects are noted by record vacancies and sublease rates.
Still there are pockets of true, unadulterated value for companies looking for commercial space in Houston. The right tenant can get a great deal while also reaping the benefits of being located in a business-friendly state. Even more so, because landlords in Houston may be willing to be more competitive than in other traditional Texas hubs.
So read on about this currently complicated and promising city, and why it may be a match made in heaven for corporate tenants.
Business-Friendly Houston
Houston has emerged as an extremely attractive prospect for commercial real estate. With 23 Fortune 500 companies residing in Houston, it is a central source for business activity. Houston’s pro-growth attitude towards corporate relocation and its rapid population growth makes it an ideal destination for businesses looking to lower their overhead costs.
Houston is the fourth largest city in the United States. It is also has experienced the decade’s largest population boom among the ten most heavily populated U.S. metro areas. As such, it has been a hotspot for commercial real estate.
The abundance of established businesses and newer startups has created a healthy competition between companies to secure prime properties. This is common throughout Texas and the Sunbelt region in general. Many businesses are relocating from traditional (and expensive) business hubs like New York and California. For instance, Hewlett Packard Enterprise recently relocated its global headquarters from California to Houston. Learn about the Other Texas Cities with the Most Inbound Moves.
Houston’s excellent connectivity and infrastructure make it appealing to companies that wish to expand beyond their current city limits. With two major airports, a bustling port, and access to international trade routes, Houston is the perfect place for business owners who want a prime location to expand.
Low Cost of Living
Additionally, Houston boasts a lower cost of living than the national average, making it an attractive option for businesses looking to reduce overhead costs.
When the national average cost of living is 100, Houston’s is 94. So, while one would think the population boom would drive up costs, life has remained reasonable for Houston citizens. For example, Houston’s housing costs are 18% percent below the nation-wide average, according to Costar.
Accordingly, it is a hotspot for businesses looking to cut expenses in rent, taxes, gas, etc. Similarly, the low cost of living strengthens the dollar’s buying power. This, in turn, raises the quality of life as citizens have more spending power.
Houston’s Office Rents
The office rents go hand-in-hand for the reasonable living costs. Class A Office Rent per square foot goes for $34. Now compare this to cities like Manhattan, where businesses regularly pay up to three times more than this sum.
To see how much a business can save over a lease term by moving to an area of lower overhead like Houston, let’s say a tenant wants to lease 50,000 square feet. If they opt for New York City, and are extremely lucky to negotiate an amazing deal (with the help of a True Tenant Rep™) of course, at $80 per square foot.
Over five years, by selecting Houston, millions in savings will be accrued. And this calculation only includes flat rent with no escalations, fees, etc. which you will most certainly also encounter.
If you’re interested in leasing space, whether it’s in Houston, Manhattan, or anywhere else, your deal will depend on how prepared you are to negotiate. So, don’t leave it to chance. Learn everything you need to know to find your best office space for the best price.
Houston’s Tax Environment
Houston supports its businesses by providing world-class infrastructure and transportation, highly skilled workforces, economic incentives for corporate relocation, and a general pro-business environment.
Now, let’s look at the numbers that seal Houston as a business-friendly city.
- County Sales Tax – 0%
- City Sales Tax – 1%
- Estate Tax – 0%
- Personal Income Tax – 0%
- Corporate Income Tax – 0%
Houston’s Asset Classes
Houston’s commercial real estate environment is truthfully a mixed bag. Industrial is a top-performing asset class in the city, but office success has lagged since the pandemic.
This is curious because according to Kastle Systems data, Houston has one of the country’s top return-to-office rates at 66% occupancy. For reference, the rest of the country hit a post-pandemic high in February 2022 at 50% occupancy.
Despite the high occupancy, overall office leasing rates have taken a severe hit.
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“As of 2023 Q1, quarterly leasing was still down nearly 30% compared to levels averaged during the three years prior to the pandemic. Total leasing volume was 16 million SF in 2022, similar to 2021, but still far below the pre-pandemic average of 22 million SF per year from 2017-2019.” -GlobeST |
Not only does Houston have one of the markets with the highest vacancies, but it also has 5.1 million square feet of office space under construction, which while below historic norms, is still set to tip the scales. What do you think will happen when even more office space becomes available with the shaky demand?
Further compounding the issue is the record high availability of sublease space. According to GlobeST. “There is currently a record high of 8.2 million SF — about 2.3% of the metro’s total inventory.”
Commercial property owners in Houston are in the hot seat. As 5 million more square feet of office space hits a market already characterized by poor demand and abundant sublease space, they will be forced to adjust prices. This means that corporate tenants looking for new space or to expand their footprint in Houston, Texas may be in the perfect position to scoop up Class A premium properties for a steal.
Read more about how corporate tenants benefit when the market is inundated with sublease space. How the Sublease Boom Affects Corporate Tenants.
Promise for Commercial Leasing in Houston
Still, all is not lost for Houston. One of the most notable foundations of promise the city has been its connection to the life sciences industry.
In fact, a lot of the construction mentioned above is taking place to accommodate the demand for medical property types.
For instance, the largest life sciences developer in the country just based their new campus in Houston. This is in addition to other recent projects including a 76,000 square foot facility for a formerly Californian-based biomanufacturing facility and the $1.8 billion Helix Park Project in Houston.
Such developments are being called turning points for Houston’s biotech center and overall commercial leasing environment as they draw interest across the board from other types of tenants.
All said and done, Houston’s edgy leasing market is set to level out by the latter half of 2023. Construction rates are set to stabilize, and office activity will get some relief.
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“Office vacancy rates will likely tick down after 2023, with construction pipelines diminishing and the number of office-using employees growing in the years following 2023.” -GlobeST |
Why Houston is Great for Corporate Tenants
With its booming population growth, low cost of living and excellent connectivity, Houston is a great option for businesses looking to invest in commercial real estate.
And now is a better time than ever. Since the pandemic, tenants throughout the country have been in a good position to secure affordable Class A office space. Office use is down, and even though occupancy rates are slowly climbing, some regions are taking longer to return to normal.
Houston now represents a sweet spot. It’s an area where tenants can take advantage of low demand for office space while still securing a spot in a sought-after city. Because with the abundance of available properties and sublease space, it’s more likely than not that you can negotiate your dream lease, cutting costs in rent, better lease terms, etc. Why will this work? Because you’re willing to sign a long-term lease or large footprint in a time where many businesses aren’t.
So, if you’re looking for new office space or just curious about what other cities have to offer, don’t count out Houston. While the CRE sector may seem complicated right now, it’s really putting corporate tenants in a good position to benefit from not only the tax-friendly environment and bustling culture, but extremely affordable leases!
Find Space in Houston with a True Tenant Rep™
As discussed, Houston provides corporate tenants an excellent opportunity to save millions in their overhead costs. But this is only if you do it right. There’s a lot of moving pieces to pin down when looking for new space (especially if you’re looking in an alternative market.)
From sourcing market data to creating multiple offers and leveraging the value of your tenancy, it’s best to work with a Tenant Representative- or even a step further- a True Tenant Rep™.
At iOptimize Realty®, we are True Tenant Reps™. This means we only work for tenants, so we are empowered to get them stronger deals. We have 30+ years of finding our corporate clients the best properties with the best terms for the best price. So, if you’re curious about Houston’s market, team up with a True Tenant Rep™.
But relocating is truthfully a massive undertaking. If you’re not ready to pick up and move, don’t worry. A Tenant Rep can still be a valuable asset for you. We can help Right-size your portfolio or individual properties, renegotiate existing leases, and provide critical assistance on your commercial leases. All said and done, a Tenant Rep could save you millions (whether you’re moving or not).
Talk to a True Tenant Rep™ today to learn how you can start optimizing your CRE.
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