Houston office occupancy expected to fall further

Exterior photos of 609 Main Street in downtown Houston on Thursday, May 18, 2017. Exterior photos of 609 Main Street in downtown Houston on Thursday, May 18, 2017. Photo: Elizabeth Conley, Houston Chronicle Photo: Elizabeth Conley, Houston Chronicle Image 1 of / 1 Caption Close Houston office occupancy expected to fall further 1 / 1 Back to Gallery

The local office occupancy rate could fall to 81.6 percent by the end of the year as the market continues its sluggish recovery from the energy slump, a new report shows.

Landlords are facing more vacancies as sublease listings expire and begin to roll over to direct space. Direct occupancy was 82.3 percent in the second quarter, according to commercial real estate firm PMRG.

Property owners are offering an average of 12 months free rent and $100 per square foot in tenant improvement allowances for long-term leases of prime space, according to a separate report from CBRE.

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While the sublease glut appears to be stabilizing, at 11.1 million square feet, it remains well above its 12-year average of 4.6 million square feet, PMRG said.

Growth in the overall office leasing market is expected to return in 2018, the company predicts, but the energy sector isn't likely to follow.

"Future leasing demand from the energy sector will likely remain suppressed with the abundance of sublease and shadow space that must be dealt with before tenants lease additional space," the report reads.

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The Downtown, Energy Corridor and Greenspoint submarkets all lost ground in the second quarter, largely the result of companies, including ConocoPhillips, Energy XXI, ENI Petroleum and Weatherford International, putting space back on the market.

Free rent and generous build-out allowances are expected to be around "for the long haul," PMRG said.