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Houston CBD Tops Nation in Office Rent Growth

Office rent in downtown Houston increased 52.4% year-over-year in 2007 – the greatest gain of any central business district in the nation, according to Colliers International.

“What was the strongest office market in 2007? I would have to say Houston,” says Ross Moore, senior vice president and director of market and economic research at Colliers’ office in Boston.

Average rent in the Energy City climbed to $36.40 per sq. ft. at the end of the year from $23.90 a year earlier, averaging a gain of more than $1 per month. Vacancy for Class-A offices in the CBD stood at 7.2%, which is essentially full occupancy for a Texas city, Moore says.

Houston’s rent gain is partially a rebound for a market that languished in the wake of the Enron scandal. With oil selling near $100 per barrel, the energy industry is back in expansion mode and helped the metro area add more than 58,000 jobs last year, contributing to demand for space throughout the city. The local office market absorbed 6.2 million sq. ft. in 2006 and 5.8 million sq. ft. in 2007, Colliers found.

The impressive rent growth in Houston’s CBD may have been an isolated event due to the city’s place in the global energy markets. The Boston suburban market, however, posted a similar surge in rent that seems to reflect growth in an industry fueling office demand in several U.S. metros. Boston topped Colliers’ list of suburban rent-growth leaders with a 52.7% gain year-over-year, followed by San Francisco with 47.8% rent growth, San Jose/Silicon Valley at 27.9%, and Seattle at 27.4%. All of those markets enjoy a strong employment base in high tech that seems to be driving demand for office space and fueling rent growth.

Nationwide, the office picture is more sobering. The overall vacancy rate for office increased in the fourth quarter to 12.54%, up 18 basis points from the third quarter, marking the first vacancy increase since 2003. The national market absorbed 9.7 million sq. ft. of office space in the fourth quarter, significantly down from the previous quarter’s absorption of 18.3 million sq. ft. That brought total absorption in 2007 to 62.7 million sq. ft., well below the 95.8 million sq. ft. of absorption Colliers tracked in 2006.

“The world looks very different now than it did just three months ago,” Moore says. “While we had marked down our fourth-quarter projections, this quarter’s office absorption numbers were still considerably below our latest revisions. This suggests that the first half of 2008 could be marked by relatively anemic leasing conditions for many U.S. cities.”

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