Demand for Houston office space plummeted in May, and the weather is likely to blame

May was Houston’s slowest month for office demand so far in 2024, and the deadly derecho was likely to blame, according to office leasing platform VTS.

Courtesy of Landon Schaeffer

A derecho ripped through Houston on May 16, shattering thousands of windows in downtown buildings due to winds gusting to 100 mph.

Demand from mid-sized tenants fell 38% month-over-month in May, and demand from large tenants fell 48%, according to data from VTS, which tracks tenant tour activity. Houston also saw a residential market decline in May, with home sales down 1.5% from a year earlier.

The declines seen in both markets are believed to be linked to extreme weather conditions.

A derecho – a severe storm marked by intense, fast winds – devastated Houston on May 16. It killed eight people, shattered thousands of windows in downtown skyscrapers and left more than $1 billion in damage.

“Having a weak May is not very typical,” said Max Saia, director of investor research for VTS. “May is generally a stronger month. Demand is seasonal, but it tends to increase until the peak of the summer months when we see a decline.

Unusually severe weather is likely the main cause of the decline in activity, according to VTS. The May decline follows several strong months for office demand, so the drop is not catastrophic, Saia said.

Small office tenant visitation activity increased 92% in February, March and April compared to the previous three months, and 77% year over year, according to VTS data.

Since the start of the year, demand for new office space has increased 31% year-on-year, the data shows. That represents a 10% decline from pre-pandemic levels, but gives Houston the second-highest market ranking according to VTS analytics, behind Los Angeles.

“Despite a weak May, this is one of the best performing markets we track,” Saia said.

Houston still faces an oversupply problem, but there are good indicators in the office market, he said, adding that VTS is seeing solid growth and momentum in Houston.

VTS collects new data on office demand through software that allows landlords to track their process leading up to leasing. The demand for new office space includes all tenants who have embarked on a search for space, even if it is to renew their lease, Saia said.

Demand was highest in the professional services sector in the three months ending in May, at 428,000 square feet, according to VTS. The professional services sector includes services such as consulting and architecture.

In April, three-month demand for office space from the financial sector increased by 91% compared to the previous three months. The legal sector also saw short-term momentum in April, with 400,000 SF over three months, a 190% improvement over the following three months and a 65% year-over-year increase.

Demand for office space in the financial and legal sectors continued to grow in May, data showed.

Going forward, office demand is expected to rebound as transactions that were delayed due to weather progress, Saia said.

“Given that May’s weakness was largely weather-related, we expect, on a year-over-year basis, that Houston will experience strong rental growth and performance,” he said .