Class A Office Market Lighting Class B Space

[IMGCAP(1)]HOUSTON-Higher rates for class A office space combined with increased demand and a shrinking amount of large contiguous blocks are having an impact on the class B market. In the past year, vacancy has dropped 8% among class B buildings, a trend that’s predicted to continue.

According to Grubb & Ellis Co.’s third-quarter report, there is seven million sf of empty class A space in its 77.3-million-sf inventory and 9.7 million sf vacant in the 64.4 million sf of class B space. Looking at it from an occupancy perspective, class A is 90.9% filled and class B, 85%. Class A rent averages $29.13 per sf and class B, $19.51 per sf. The report puts spec construction at 4.3 million sf.

Transwestern Houston’s researchers peg class A occupancy at 92% in its 93.7 million sf while class B’s 90.1 million sf is 87% filled. An additional five million sf is under construction or being renovated. The average class A rate is $20.25 per sf; class B, $16.10 per sf.

David Lee, Transwestern’s vice president, says the statistics represent a classic demand for class B space in a rock-solid market. “The same, identical conditions occurred in our last boom market during the late 1990s,” he tells GlobeSt.com. “Class A occupancies were well above 90%, rents started to increase and tenants who had an option to renew chose less expensive product.” He believes that in the current cycle, class B office space, especially in the stronger submarkets, is poised for continued strong performance for the next couple years.

[IMGCAP(2)]Ariel Guerrero, Grubb & Ellis’ client services manager for Texas, agrees with Lee’s assessment. Guerrero adds because basic fundamentals remain strong, office demand will continue to increase and operating costs will escalate, driving up class A rents as well. “In the short-term, we’ll see more in terms of leasing velocity in the class B market,” he says. “Especially with lease expirations coming on line within the next year, class B might be a good alternative to some of the tenants.”

Guerrero says it’s too early to really determine the impact of office construction on the class B sector. He points out, however, that much of the four million sf to five million sf is already preleased. “Vacancies will likely level out a little more because of the newer construction,” he says.

Lee believes the new space is manageable and able to be absorbed. He is concerned about projects presently on the drawing board, but not yet on the ground. “Fortunately, those aren’t set to be delivered for two years,” he says. “The ideal scenario would be that product currently being delivered will be stabilized by the time the second wave hits the ground.”