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News release

Houston, TX

Houston’s Skyline Office Space Still Commands Top Dollar, But Asking Rents and Activity Have Softened

JLL’s 2016 Skyline reveals Houston market is characterized by contradictions


HOUSTON, June 23, 2016 – Houston’s Skyline, a building set defined as trophy high-rise properties over 500,000 square feet located in the CBD, is characterized by contradictory market fundamentals as tenants and landlords alike remain cautious in the face of ongoing market volatility and concern over oil prices. A 37 percent drop in leasing activity in 2015 set the stage for slight negative absorption in the first quarter of 2016, yet asking rents remain near all-time highs. Sublease space climbs to record levels, yet direct vacancy persists below 10 percent.

JLL’s 2016 Skyline report reveals two important themes.

  • Skyline assets continue to significantly outperform the overall Houston Class A office market
  • Rent growth and leasing activity, even within Skyline assets, have flattened

Skyline properties outperform Houston office market

The Houston Skyline recorded a direct vacancy rate of 9.4 percent in the first quarter of 2016, which is significantly lower than the market-wide Class A direct vacancy rate of 15.5 percent.

“Despite superior occupancy and historical leasing volumes when comparing the Skyline and broader Class A market – leverage within the Skyline will continue to shift in favor of tenants in 2016,” said Eli Gilbert, JLL Vice President of Research. “This will manifest as decreasing rents, increased flexibility in lease terms and expanded lease concessions to tenants as owners vie for fewer tenants.”

JLL’s 2016 Skyline report shows the Houston Skyline will remain tenant-favorable through 2017 but should return to a neutral market in 2018 given forecasted demand and the lack of new construction entering the pipeline.

Decrease in investment volumes

Overall investment volumes in Skyline markets across the U.S. fell slightly in 2015, due to strong demand and liquidity for Skyline assets earlier in the economic cycle as well as the generational nature of many acquisitions since the Global Financial Crisis. The scarcity of opportunities meant only 9.5 percent of the Skyline across North America traded in 2015, down from 10.7 percent in 2014. However, the drop in investment volumes in the first quarter of 2016 was even more precipitous – down more than 72 percent in primary markets and nearly 47 percent in secondary markets. Likewise, Houston has observed a notable decrease in investment activity in 2016 thus far.

“Transaction activity in multitenant buildings is down considerably due to the prolonged downturn in the price of oil and its impact on Houston’s economy. We expect to see continued low volumes of investment activity for the time being,” said Rudy Hubbard, JLL Managing Director. “That being said, there are a multitude of investors looking for an opportunity in Houston. When activity begins to pick up, investors will chase the trophy and Class A assets that make up Houston’s Skyline, which traditionally outperforms the broader office market.”

What have you done for me lately?

Despite the rise in popularity of urbanized suburban markets, assets within the Skyline are still the gold standard both across U.S. markets and in Houston. However, owners need to stay mindful assets don’t tarnish with complacency. For example, in downtown Houston, that means landlords have had to make significant lobby and plaza upgrades.

“Truly successful landlords understand they must create an environment in which a tenant’s business can flourish by providing an amenity base that enhances the productivity of the workforce,” said John Pruitt, JLL Executive Vice President. “Currently, we’re seeing a heightened level of amenity improvement projects in Houston’s CBD as a result of the understanding that trophy buildings don’t stay trophy buildings unless they are continuously upgraded and able to meet modern standards of top tier office space. Landlords are increasingly transforming underutilized plaza, lobby and open spaces into collaboration and co-working areas, in addition to using these spaces to address the fitness, conference space and dining requirements of tenants.”

About the Skyline Review

Investors and tenants alike can access JLL’s Skyline via a digital platform. The fully interactive website will feature JLL’s proprietary market insights regarding office supply, demand, rents, leverage and investment into 52 markets across the United States and Canada, with the ability to compare and contrast individual markets or multiples of markets as well as individual properties or portfolios. In addition, the site will offer videos and infographics. All information will also be available via mobile access.

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About JLL

JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 280 corporate offices, operates in more than 80 countries and has a global workforce of more than 60,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. Its investment management business, LaSalle Investment Management, has $58.3 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.