Downtown Office Market

[jt16]

My company is currenlty renegotiating our office rent downtown in the Allen Center (97% leased). Our broker at Cushman Wakefield made a comment that there are rumors in the real estate community of three new office buildings downtown.

[nmm]

Who would use them?

From my POV, given Houston's spread out geography and boom-bust-boom economy, it would be a great hassle to build more towers.

And if i did build, i would build something like KBR Tower. Nothing too fancy. Wouldnt take the risk.

[H-Town Man]

The 70's/80's thing isn't going to repeat. We're much more economically-diversified this time around, which translates to slower more steady growth, as opposed to boom/bust, which is what tends to produce the skyscrapers.

Employment growth is also more spread out because medium-sized businesses don't really benefit all that much more from paying higher rents for a more central location when there is an adequate suburban labor force to meet their needs. They also don't need (or necessarily want) highrise buildings. So even when job growth by the numbers exceeds that of the boom years, the impact isn't as visually apparent.

It probably also doesn't help that the ratio of office square footage per employee has shrinked down to about 275sf per employee in the Central Business District. Companies are really packing them in these days.

Do you happen to know about how much the sf per employee was back in the 80's? Also, how the 275sf figure compares to other markets? I've heard that the oil industry tends to give employees more space than other industries.

I wonder if a lot of the growth the past ten years or so has been absorbed by compression of office space (densification rather than expansion), and now that it has been compressed so much, they are going to start having to build new space at a faster rate than before. Probably wishful thinking.

[TheNiche]

Do you happen to know about how much the sf per employee was back in the 80's? Also, how the 275sf figure compares to other markets? I've heard that the oil industry tends to give employees more space than other industries.

I wonder if a lot of the growth the past ten years or so has been absorbed by compression of office space (densification rather than expansion), and now that it has been compressed so much, they are going to start having to build new space at a faster rate than before. Probably wishful thinking.

I'm not sure about what it was back in the 80's, but I'd imagine that it would've been >350sf per employee. Possibly higher. The suburban ratio is probably somewhat higher than in the CBD but typically <350sf.

Up until about 2000, you would've been right that the oil industry was fairly low-density. But after the office market got tight, the big players started consolidating employees into more cramped quarters. I had a relative that worked with Shell's real estate department at that time, and they were frantically trying to free up space and and sublease the space. Post-Enron, they negotiated to cancel as many leases as possible.

Your intuition is correct that densification has resulted in less robust office absorption in the past is on the mark. In suburban office environments, for instance, parking ratios of investment-grade buildings used to be about 3 spaces per 1000 square feet. Now, 4 spaces per 1000 square feet is considered the absolute minimum. In urban areas with a relatively fixed amount of parking, on the other hand, increased carpooling and mass transit use have helped to make higher employee densities possible.

[Houston19514]

GlobeSt.com has news this afternoon of a company taking a 40,000 square foot lease of the top two floors of Heritage Plaza. The company is moving downtown from the uptown area. The lease takes Heritage Plaza to 77% occupancy. The article went on to say that Heritage Plaza is just completing renovations and did not start seriously marketing their space until renovations were done.

Edited March 28, 2007 by Houston19514

[Houston1stWordOnTheMoon]

More good news for Dwntwn

[nmm]

It sounds like Uptown and Downtown are competing for tenants

[tierwestah]

It sounds like Uptown and Downtown are competing for tenants

It's been that way for years!

[ricco67]

I would imagine that they moved to for favorable terms and was able to find more space that was contiguous for their needs. It could be that uptown is probably having the same issues that the CBD is having.

[Houston19514]

New CBRE 2nd quarter office market report:

Entire market office vacancy rate is down to 11.11%, with almost 1.5 million square feet net absorption during the second quarter.

Downtown's vacancy rate is down to 11.34% (all classes combined), down from 12.55% last quarter, with over 500,000 square feet net absorption during the second quarter!

Further, they note that almost all recent new construction has been in the suburbs, but the CBD is about to take center stage: "In the CBD, where almost no new construction has occurred in recent years, growing demand and shrinking supply are now combining to initiate a new round of development. No buildings have been formally committed at the moment, but we anticipate the construction of 4 to 5 buildings totaling 3 to 4 MSF.

Colliers is also out with a 2nd quarter report:

Total vacancy of 13.4%, down from 16.3% this time last year, with 2.85 million square feet net absorption during the 2nd quarter.

Downtown's Class A vacancy rate is 9.6%, down from 18.7% last year this time. Overall CBD vacancy of 14.4%, down from 20.1% last year this time, with over 1.25 MSF net absorption.

And one more, from Grubb & Ellis:

Overall vacancy rate: 12.8%, down from 16.5% last year at this time, with 2.7 MSF net absorption during the 2nd quarter. Overall Class A: 9.1% vacant, down from 14.5% last year at this time.

CBD (all classes): 11.5% vacant, with 1.7MSF net absorption during the 2nd quarter.

CBD Class A: 8.7%, down from 23.4% last year this time.

[Trae]

Damn, Downtown is going good. I hope all five proposed buildings are built.

[The Great Hizzy!]

That 9.6% and 9.1% Class A vacancy rate reported by Colliers and Grubb & Ellis look damn good. I wonder if they factor in the old Sheraton Hotel as "overall" office space (I'm referring to the former hotel next door to 1201 Louisiana)? If so, that vacancy would come off the boards as well if the plans to convert the building into a massive custom suites hotel come to fruition.

Edited August 1, 2007 by The Great Hizzy!

[pm91]

i read like 2 weeks ago in i think the houston biz journal that vacancy was only 8% now. and the energy corridor is only 2%.

[Houston19514]

That 9.6% and 9.1% Class A vacancy rate reported by Colliers and Grubb & Ellis look damn good. I wonder if they factor in the old Sheraton Hotel as "overall" office space (I'm referring to the former hotel next door to 1201 Louisiana)? If so, that vacancy would come off the boards as well if the plans to convert the building into a massive custom suites hotel come to fruition.

No, the old Sheraton would almost certainly not be counted, since it has never been office space and has not been marketed as office space.

[strickn]

Damn, Downtown is going good. I hope all five proposed buildings are built.

http://www.globest.com/news/964_964/houston/162890-1.html

Don't count on it.

"With construction costs so high, the current rental rates can't support the newer buildings," he says. "We'll have to see much higher rental rates for those buildings to get built. And tenants need the space." David Lee, senior vice president for Houston-based Transwestern, not only agrees, but points out replacement costs for new product will need to have nearly $40-per-sf gross quotes to justify costs [this article is spurred by the first building in the city hitting $30]. It's a matter of economics. "When in a condition of limited supply, rates will increase closer and closer to the cost of the new replacement product," Lee says. "This is something we've seen before."

[SecondTour]

Interesting article in the Times today about vacancies.

NY Times

[editor]

But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses.

At least the times used a really nice picture of downtown Houston construction instead of some old stock photo.

[totheskies]

In the case of Main Place, they still have some major tenants on board for the project so it's highly unlikely that this particular project could get cancelled. Houston's vacancy rate may certainly grow over the year, but I don't see that happening much in downtown. Outlying office parks that are already on the downslide (think Greenspoint) are going to be the most vulnerable in the current recession. Houston has established too strong a pattern of inward growth... people moving inside the loop. So although some major projects will be halted or cancelled, people are going to take advantage of the little remaining space that is available, especially in downtown.

One thing I really like about Houston right now... most of our projects have been borne of necessity. The projects of lesser need have quickly fallen away, and the few things that remain are only going to benefit the area.

[uhlaw09]

Anyone who thought we would still be immune after oil lost 80%+ of its value in a period of 6 months is out of touch with reality.

Edited January 5, 2009 by uhlaw09

[totheskies]

Anyone who thought we would still be immune after oil lost 80%+ of its value in a period of 6 months is out of touch with reality.

Yeah, just wait until oil gains all of it back in 5 months... there is no reality with oil prices.

[gene]

One thing I really like about Houston right now... most of our projects have been borne of necessity. The projects of lesser need have quickly fallen away, and the few things that remain are only going to benefit the area.

haha! never have i read a more true statement!

so many things are being cancelled that werent needed in the first place.

an example: Did we really need the Titan? The Galleria area is already overcrowded with unfilled high rises...

oy

[UrbaNerd]

Let's hope they don't chop 30 stories off of Mainplace or anything like that!

[TheNiche]

In the case of Main Place, they still have some major tenants on board for the project so it's highly unlikely that this particular project could get cancelled. Houston's vacancy rate may certainly grow over the year, but I don't see that happening much in downtown. Outlying office parks that are already on the downslide (think Greenspoint) are going to be the most vulnerable in the current recession. Houston has established too strong a pattern of inward growth... people moving inside the loop. So although some major projects will be halted or cancelled, people are going to take advantage of the little remaining space that is available, especially in downtown.

One thing I really like about Houston right now... most of our projects have been borne of necessity. The projects of lesser need have quickly fallen away, and the few things that remain are only going to benefit the area.

It's very far into construction. Unless the construction lender goes belly-up and stops funding the project, it will be completed. Even if firms back out of their pre-leases, the project will go on. This one isn't going to be cancelled.

Houston has established too strong a pattern of inward growth...

No, not really. I once went through the demographics and determined that for about every one new household created inside the loop, about 22 were being created beyond it and elsewhere within the Houston-Baytown-Sugar Land MSA. A scarcity of land will do that, and residential density ain't cheap. If there's any doubt about this, the Texas Medical Center has available a map indicating into which Zip Codes employees tend to live. Many live inside the loop, with especially large concentrations in the many old apartments around Reliant Park. Many more live in Pearland or Sugar Land. The shiny new areas of the Inner Loop are a mere footnote in comparison. They may as well be Cinco Ranch. I suspect that Galveston County is now a prominent source area, what with the elimination of UTMB.

[houston-development]

i would say "i told y'all so" but that wouldnt do any good.

having said that, i honestly believe its going to get a lot worse. if oil stays below $40 and the national economy doesnt improve, i think houston is going to suffer pretty badly. not mid 80s bad but it aint going to be pretty... keep some powder dry and there will be a lot of opportunities with significant upside.

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[TexasVines]

40 dollar oil would have been a God send just 6 years back so Houston can still do quite well with 40 dollar oil anything over 30 is enough to keep most projects running and allow for new exploration on a small basis....even a few years back 25 was the goal to keep things running

looking at the chart above oil has RARELY been over 30 a barrel and often well under that and Houston has survived even when it was much more dependent on oil than it is today

the consumption of energy is not going away....and if the price stays too low too long and exploration is cut then that will only lead to what we have seen recently which is a massive spike in price when people see that there is a shortage because new resources have not kept up with consumption...Houston is a boom and bust town that is what has helped make it the special place it is....Texas in general is the same be it cotton, cows, or oil only now people are more and more realizing this and not being so crazy in the good times so they are ready for the bad....but no matter what we will survive and when things come roaring back we will just survive better and have more fun doing it

[Houston19514]

i would say "i told y'all so" but that wouldnt do any good.

This might be a good time to ask you what ever became of that blood bath in the apartment market you told us we were going to have in 2007... we're still waiting. ;-)

[houston-development]

This might be a good time to ask you what ever became of that blood bath in the apartment market you told us we were going to have in 2007... we're still waiting. ;-)

awww look, its my little personal troll. hope you had a good new years.

i like how you revise history. the blood bath was suppose to occur in 2008 but due to houston's employment, the units got filled. guess you knew our job growth would top the nation, huh?

now that oil has plummeted, do you think we are going to equal or even come close to that growth? think we are still shielded from the national recession? uh, no.. we could see +/- 50k loss and some estimate 100k+ loss in the next 18 months.

less jobs + even more units = blood bath

its already starting to happen. rather than getting your insight from articles, go pound the pavement and see how the market is really doing. a month or two ago, in-fill "a" communities were giving 4 weeks free on a 13-month lease. today, its now up to 8 weeks plus reduced deposits.

but hey, what do i know; this is what i do.

[Houston19514]

awww look, its my little personal troll. hope you had a good new years.

i like how you revise history. the blood bath was suppose to occur in 2008 but due to houston's employment, the units got filled. guess you knew our job growth would top the nation, huh?

now that oil has plummeted, do you think we are going to equal or even come close to that growth? think we are still shielded from the national recession? uh, no.. we could see +/- 50k loss and some estimate 100k+ loss in the next 18 months.

less jobs + even more units = blood bath

its already starting to happen. rather than getting your insight from articles, go pound the pavement and see how the market is really doing. a month or two ago, in-fill "a" communities were giving 4 weeks free on a 13-month lease. today, its now up to 8 weeks plus reduced deposits.

but hey, what do i know; this is what i do.

LOL Revise history indeed. FWIW, in January 2007 you predicted negative absorption for 2007 and a bloodbath. Neither prediction came true. A(nd yes, it was fairly clear in January 2007 to even a casual observer that Houston would be having healthy job growth in the coming months.)

Here is the quote cut directly from your January 25, 2007 post:

"thats what happens when you build 17,000 units. yes, you read that correctly...

we are expecting seventeen thousand units to come on line this year.

*coughbloodbathcough* "

(And by the way, your statement of 17,000 units coming on line in 2007 was inaccurate as well, as I pointed out at the time, and needless to say, did not happen)

Very cute how you try to turn your past mistakes into an argument about current circumstances. No doubt the market is currently struggling more than during the "bloodbath" years of 2007-2008. Nobody claimed otherwise. Also, I never claimed Houston was immune from the national recession. But so far, we're really faring pretty darned well. IF, we lose 50K jobs in the next year and that is one giant IF, considering at last report, I believe we were still showing pretty decent job growth, we will probably see some serious difficulties. At present however, we're still a long way from anything like a blood bath, my friend. (A couple of new complexes giving extra free rent to try to fill up their complexes quickly does not equal bloodbath.)

Who knows, maybe you'll be right this time and you'll get your bloodbath and move your "batting average" up to a solid 50% ;-)

Edited January 7, 2009 by Houston19514

[houston-development]

blahblahblah

im not going to waste bandwidth refuting your so-called retort that has obvious holes in it. credible reports (ie ads, oconnor, ect) all said 17k units in 07. im pretty sure in the same thread, i said that number could be lower, which you obviously decided not to selectively quote. furthermore, if you knew anything about the business, you would understand why the impact would be the following year. no where did i even imply the effects would be felt jan 25 2007.

NO ONE at the time thought houston would explode in employment growth in 08 while the rest of the country went into the crapper. if you honestly thought otherwise, hope you put your money where your mouth is. pretty positive you didnt but who knows.

if you think my "batting average" for these boards is sub 50%, by all means think that. you're wrong, period, but keep thinking that.

in conclusion, you get your information from nancy sarnoff and other media sources. i get mine first hand experiences and other personal resources i deem reliable. neither are ever 100% accurate but i damn well will put mine over yours in a heart beat. to that, you are more than welcomed to respond but i wont read it. welcome to my ignore list.

[Houston19514]

im not going to waste bandwidth refuting your so-called retort that has obvious holes in it. credible reports (ie ads, oconnor, ect) all said 17k units in 07. im pretty sure in the same thread, i said that number could be lower, which you obviously decided not to selectively quote. furthermore, if you knew anything about the business, you would understand why the impact would be the following year. no where did i even imply the effects would be felt jan 25 2007.

NO ONE at the time thought houston would explode in employment growth in 08 while the rest of the country went into the crapper. if you honestly thought otherwise, hope you put your money where your mouth is. pretty positive you didnt but who knows.

if you think my "batting average" for these boards is sub 50%, by all means think that. you're wrong, period, but keep thinking that.

in conclusion, you get your information from nancy sarnoff and other media sources. i get mine first hand experiences and other personal resources i deem reliable. neither are ever 100% accurate but i damn well will put mine over yours in a heart beat. to that, you are more than welcomed to respond but i wont read it. welcome to my ignore list.

LOL You never really were very good at keeping your facts straight. Let me clarify again for you. NO credible report (including ads, or oconner) ever said that 17k units would be delivered in '07. NONE. And yet you kept pretending and continue to pretend that they did. What they in fact said was that approx. 17,000 were under development at the end of 2006, not that 17,000 would be delivered in '07. HUGE difference and it's mystifying that someone who claims to be in the industry does not seem to understand the difference. And contrary to your revisionist history, back in late 2006-early 2007 you are the one who first posted the misinformation regarding the "delivery" of 17,000 units to the market in 2007 and then you carried on for post after post insisting that 17,000 number was the correct number.

-- In fact, I did not say anything about knowing that Houston would "explode" in employment growth in 2008. And again, you are being dishonest to pretend I did. And it is being either ignorant or dishonest to pretend that nobody expected good solid employment growth in 2007 and/or 2008. On the contrary, I think it was widely expected.

-- I also did not say anything about the effects being felt on Jan 25, 2007. And it's again dishonest of you to pretend I did. But if YOU knew anything about the business you would know the effects of a so-called "bloodbath" would not all of the sudden appear on Jan. 1, 2008. And the fact remains, the bloodbath didn't happen in 2008 either. And it STILL hasn't happened.

I wasn't really referring to your overall batting average, but to the extent you make any meaningful predictions, I think it probably is not much above 50% (and "predictions" such as "predicting" that Highland Village will tear down the former Gap and Harold Powell buildings to be replaced with new 2-3 story retail structures months after they issued a press release to that effect don't count.) Of course, when you serially predict death and construction for projects, such as 2727 Kirby, you are bound to be right on one of your predictions, but it does tend to lower your percentage. ;-)

You can ignore me all you like. But that won't stop me from correcting your misstatements and lies.

Edited January 7, 2009 by Houston19514