Home | State Tax Profiles | Tax Calendar | Locations | Client Connect Login

Uncertainty in the Houston Office Market

by Kenneth Graeber, Houston, August 2020

 

The already weak Houston office market has taken a double hit in 2020 with the combined impacts of the COVID-19 pandemic and decline in the energy sector.

 

While significant uncertainty exists, projections are for increases in vacancy, declines in rental rates, and more concessions.

 

Absorption and Sales Decline

 

During the second quarter, Houston’s office market saw over double the amount of space that tenants were moving out of compared to the first quarter of 2020, according to research by NAI Partners. The aggregate effect of the net occupancy decline was just over 850,000 square feet of negative absorption for the quarter, pushing the metro vacancy rate up to 22.3%. The Central Business District vacancy rate was higher at 26.7%.

 

The pandemic has caused many investment deals for office buildings to be put on hold. Real Capital Analytics reports quarterly office sales volume during the second quarter fell to $70 million. That’s compared with $715 million during the same period last year.

 

Increased uncertainty is negatively impacting the values for the majority of all office assets. With limited opportunities for new leases of existing space, properties currently having, or soon to have high vacancies face critical declines in value. Some may face foreclosure risk.

 

A Tenant’s Market

 

The Houston office market has been on a downslide the past five years with all-time highs in sublease inventory coming to market. With current market trends, tenants have the upper hand.

 

Analysts believe office property tenants may now have more leverage than at any other time in history with regards to negotiating rental rates, terms, tenant improvements and concessions.

 

The Impact on Property Taxes

 

Appraisal authorities have indicated that valuation issues associated with COVID -19 will be not be addressed until 2021.

 

While long-term office space requirements in a post-COVID world, may not be known, it is clear that declines in occupancy and actual market rents, along with increasing concessions and cap rates are negatively impacting values. This should translate into lower property tax values on offices, especially those having vacancy issues in 2021.

 

However, even if assessed values decline, property tax bills may conceivably increase if tax jurisdictions approve higher tax rates.