By Jim Arket on 3/23/10:

Office building construction costs and rental rates in Houston hit the demand ceiling in the last half of 2008. Plunging tenant demand coupled with increasing owner liquidity shortfalls due to restricted credit has created problems for owners but, at the same time, providing opportunities for tenants and buyers.

Fiscal year 2009 was the first time in over six years that Houston's office space market has experienced negative net space absorption. The office vacancy rate jumped from 12.7% to 16.4% during the period from 4th Quarter 2008 to 4th Quarter 2009. Weighted average rental rates dropped from $23.96 to $23.35 per square foot.

Since job creation is the driver behind office space absorption, and energy industry growth is the major indicator locally, do we see any light at the end of the tunnel? Well, local employment growth did plummet from an eight-year high in 2007 of (+4.6%) to a low of (-3.9%). But, much of the decline was from industries other than energy. After months of delaying decisions and reducing debt burdens, we are currently experiencing a measured return in corporate real estate decision making, which is a direct result of anticipated future employment demand. Perhaps the projection by IHS Global Insight that Houston will return to pre-recession job levels by late 2011 is on target.

The takeaway: Rental rates and demand are at a decade low. The next 12 months will be an exceptional opportunity to secure a very beneficial long-term lease.