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mattyt36

Future Conversions of Postwar Class B Office Space

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I think this is the appropriate forum to post this question is ...

 

When I was in Dallas several months ago I was surprised to see how many former office buildings had been converted to residential or hotels. Republic Center, The Drever, The Merc, One Dallas Center—I’m sure there are several more.

 

Is there any speculation that this could happen in Downtown Houston as well as the market sorts itself out with all of the vacant space and new Class A+ towers? 

 

800 Bell seems like such a distinctive tower for this sort of redevelopment, but there are several other examples ... 4 Houston Center also comes to mind.

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I guess silence implies no one thinks it's possible!

 

So from the recent HBJ Office Leasing Guide, here are downtown buildings with vacancy in the neighborhood of 50%:

 

800 Bell (Exxon) / 1,314,350 sq ft / 100% vacant

 

1600 Smith (Continental) / 1,098,399 sq ft / 46% vacant

 

GreenStreet (just NRG or also retail?) / 656,994 sq ft / 47% vacant

 

811 Louisiana (Two Shell Plaza) / 577,735 sq ft / 47% vacant

 

4 Houston Center (above The Park) / 674,246 sq ft / 40% vacant

 

1415 Louisiana St (Wedge) / 536,626 sq ft / 57% vacant

 

Esperson / 298,513 sq ft / 60% vacant

 

1010 Lamar (Younan) / 258,776 sq ft / 46% vacant

 

Anyone have comparables for square footage of Le Meridien and JW Marriott?

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I would be a smidge surprised to see a building like 1600 Smith get converted... Then again, while I sat in traffic on my evening commute I couldn’t help but think that both 1600 Smith and Republic Tower (sorry - can’t recall its current designation) would provide interesting upper floor conversions into hospitality projects.  Both are big enough to provide a lobby space in the main lobby area as well.  Only logistical issues would be: elevator access (not sure if a sky lobby is involved), and possibly amenity space (pool, meeting areas) etc.  It could be done.

 

Esperson is destined to become either hotel or condominium.  I just feel it in it’s future.

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29 minutes ago, mattyt36 said:

Esperson / 298,513 sq ft /

 

 

This could be a pretty decent hotel.  200~250rooms, and some nice banquet spaces?

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Dallas has had so many conversions because their office rent level is so low and vacancy has been so high for so long that owners figure they might as well. Houston landlords still find it in their best interest to wait a few years for occupancies to go back up.

 

In a perfect world, the lower levels of Class B office buildings would be converted into parking (this happened with the old Bank of the Southwest building on Travis), allowing some of our parking garages to be torn down. But it will require even higher land values than we have now for parking garages to be torn down. It's happening on Block 42 because that is premium land.

 

Agree with arche on Esperson.

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So it seems Dallas’ low rents and high vacancies are working in their favor. I would much rather have residential and hotel conversions of older buildings than have properties sit vacant for years waiting for the market to turn. 

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Posted (edited)
1 hour ago, Jbarn said:

So it seems Dallas’ low rents and high vacancies are working in their favor. I would much rather have residential and hotel conversions of older buildings than have properties sit vacant for years waiting for the market to turn. 

 

To be fair, the buildings in Dallas sat vacant for decades before they were converted.  And they still have higher office vacancy downtown than Houston.  

 

Plus, everyone seems to be ignoring the fact that we've had a number of conversions as well. (The Star, JW Marrriott, The Icon, Bayou Lofts, Franklin Lofts, le Meridian, Westin Hotel, Hyatt Place, AC hotel, Humble Building hotels... 

Edited by Houston19514
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Posted (edited)

Icon, Humble Building, Franklin, Rice and Bayou lofts we’re converted in some cases 20 years ago.  You are correct, however are those Class B?  I think most of those qualify as historical buildings (to be obvious).  I’m glad this is happening (or will), and I’m glad the historic properties are finding new life.

Edited by arche_787

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Apologies, I’m not trying to short-change the conversions that have happened.

 

An underlying trend in what I’ve been reading is that we’re probably at an inflection point with a significant chunk of real estate probably not being competitive anymore and way beyond any sort of economical conversion to be competitive ... hence why new generation Class A+ buildings are being delivered (and financed! An important sign!) despite the historic (in a generation) vacancy.

 

There aren’t many prewar buildings left for conversion out there but there’s a good amount of square footage built in the 1960s and 1970s that probably won’t be competitive in the long term ... we’re talking about 50+-year old buildings here. 

 

So what becomes of them? Do people really think that there’s going to be a demand for office space (as the downtown market thinks about it now) that could fill these buildings in the next peak of the business cycle (which we’re admittedly probably already in)? Does a whole new class of tenant come in? Do they stand vacant for a long time like the Le Meridien? Do they get demolished to become a parking lot? Or do they get converted?

 

There is a heck of a lot of vacancy still in downtown now (many in buildings that no on here thinks of much) ... props to Brookfield for getting some major relos (although net zero from other parts of the City) ... do people really think that gets filled organically?

 

I fear unless there are several repurposing projects we’re destined for another generation of demolition and parking lots.

 

800 Bell is probably the biggest symbol in my mind ... I love that building and don’t think it needs any sort of facelift. It could be a signature conversion.

 

Anyway, thanks for the feedback.

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800 Bell is so huge, getting it redeployed in any manner is going to cost large dollars, which I guess is why the Shorenstein (sp?) proposal looked like one you would see in new construction.   If it sits neglected long enough for the shades to start deteriorating, it's going to look like absolute hell. 

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Speaking of 800 Bell, what's up with the renovation plans? It still appears on the Downtown Houston Development Map:

https://www.downtownhouston.org/development/project/800-bell-redevelopment/

 

I'm guessing it has been delayed indefinitely since there is no estimated start date. While the building's current design looks adequate, I'm sure they could attract tenants with a spiffy exterior overhaul. 

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11 hours ago, mattyt36 said:

Apologies, I’m not trying to short-change the conversions that have happened.

 

An underlying trend in what I’ve been reading is that we’re probably at an inflection point with a significant chunk of real estate probably not being competitive anymore and way beyond any sort of economical conversion to be competitive ... hence why new generation Class A+ buildings are being delivered (and financed! An important sign!) despite the historic (in a generation) vacancy.

 

There aren’t many prewar buildings left for conversion out there but there’s a good amount of square footage built in the 1960s and 1970s that probably won’t be competitive in the long term ... we’re talking about 50+-year old buildings here. 

 

So what becomes of them? Do people really think that there’s going to be a demand for office space (as the downtown market thinks about it now) that could fill these buildings in the next peak of the business cycle (which we’re admittedly probably already in)? Does a whole new class of tenant come in? Do they stand vacant for a long time like the Le Meridien? Do they get demolished to become a parking lot? Or do they get converted?

 

There is a heck of a lot of vacancy still in downtown now (many in buildings that no on here thinks of much) ... props to Brookfield for getting some major relos (although net zero from other parts of the City) ... do people really think that gets filled organically?

 

I fear unless there are several repurposing projects we’re destined for another generation of demolition and parking lots.

 

800 Bell is probably the biggest symbol in my mind ... I love that building and don’t think it needs any sort of facelift. It could be a signature conversion.

 

Anyway, thanks for the feedback.

 

A few thoughts. The older Class A office buildings that are struggling with occupancy and about to become Class B are not going to be demolished, they are too big and substantial. I don't think we're at the peak of an office cycle, still in a trough. There have been moves to downtown from other parts of the city - a big tenant in Greenway Plaza just signed at Houston Center.

 

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1 hour ago, CaptainJilliams said:

Speaking of 800 Bell, what's up with the renovation plans? It still appears on the Downtown Houston Development Map:

https://www.downtownhouston.org/development/project/800-bell-redevelopment/

 

I'm guessing it has been delayed indefinitely since there is no estimated start date. While the building's current design looks adequate, I'm sure they could attract tenants with a spiffy exterior overhaul. 

 

They are hoping to find a large tenant to commence the renovation. My guess is they are eyeing Chevron as a possible white knight, either to lease or just buy it outright. There is not enough market for downtown Class B office space to attempt to lease the building as-is. A precedent for this would be the conversion to residential of the RepublicBank tower in Dallas.

 

I think as the downtown retail, residential, and nightlife scene continues to take off and companies shift from baby-boomers in management to millennials, more and more tenants will be drawn in from other parts of the city, especially if there is low rent office space to fill. This will be a very gradual process, however. In Chicago, no company wants to be in the suburbs anymore. We are about 20 years behind them in this shift.

 

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Thanks everyone for their thoughts.

 

In re Downtown Houston being at a "trough" in occupancy as far as historical trends go, I agree.  That said, we're probably somewhere near the peak in the national business cycle and it is the national business cycle that's propping the economy up, kind of like in the 1990s, which was a recovery decade for the oil industry.

 

So if people agree with that (actually you don't have to agree with that, just consider it hypothetically), wouldn't that mean it's going to get worse before it gets better?  Or, at best, stable?

 

I think the other things worth considering are the exogenous trends, in particular the increasing prevalence of working from home in the "new economy," which has to result in lower demand for office space versus historical trends.

 

So we've got a whole host of things going on that could change the fundamentals . . . (historically) weak local demand for office space, weak national demand for office space, more space coming online.

 

How does the old space get backfilled?  Or does it at all?  Conversions?  Expansions?  Relocations from other Houston business districts (I'm not sure how this is good, in the long run)?  Relocations from outside of Houston (it's been awhile on that one, sadly)?  New businesses?  Demolitions?

 

I do think Downtown Dallas is the best corollary . . . that office market never recovered from the glut of space in the 1980s.  It's kind of an interesting space to walk around . . . they do have signature skyscrapers but they have a lot of older ho-hum buildings still standing . . . took a long time but a lot of them have gotten converted and it's a pretty lively place now on the main axes.  I think we may be heading in that direction.  Hope it doesn't take 30 years as it did there.

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Downtown has been able to be full when the national economy was down and empty when the national economy was up. Just depends on the energy industry, which has its own cycles.

 

On this forum in the early 2000's we were wondering how downtown would ever fill up again after all the energy traders collapsed (Enron, Dynegy, Reliant). There was this thing called "peak oil" which meant that oil was in permanent decline. It filled up in about 4 years.

 

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Posted (edited)

Well aware of the above.

 

I’m probably suffering from “this time is different”-ism.

 

But, in any case, H-Town Man apparently votes BACKFILL (energy industry?) in the potential outcomes described above.

Edited by mattyt36

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8 hours ago, mattyt36 said:

Well aware of the above.

 

I’m probably suffering from “this time is different”-ism.

 

But, in any case, H-Town Man apparently votes BACKFILL (energy industry?) in the potential outcomes described above.

 

I don't vote anything, just guessing what landlords will do. 1970's office buildings don't make great residential properties. 800 Bell might though.

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