To Survive, Downtown Houston Leaders Say City Must Continue 'Diversification Journey'

Downtown Houston is not what it once was. Depending on who you ask, that’s a good thing.

The coronavirus pandemic permanently altered the way companies approach office real estate, which is evident from Houston’s office vacancy, the highest among its peer cities at more than 23%.

But a steady increase in the number of people living in apartments, utilizing green space and attending sporting events downtown gives city leaders hope Houston's urban core can build back better by diversifying its real estate offerings and amenities to reflect a changed society.

In short, they say, downtown Houston needs to evolve into a neighborhood instead of a collection of workplaces.

“We have been on a diversification journey for four decades,” Central Houston CEO Kristopher Larson said of a process that must continue for the city to lift itself from the post-pandemic doldrums.

For Central Houston, that means more residences, which would naturally bring greater street-level vibrancy than the underground tunnels targeted at the city's daytime office workers. Business owners say it's going to require more parking as well as walkability and green space.

Downtown Houston has changed immensely since the oil price collapse of the 1980s when 40% of its employment vanished. Central Houston can be credited with much of that change since that oil bust is what led to its foundation.

“There was one reason to be downtown. People would come here to work, and they would leave. We can still feel a lot of that,” Larson said of downtown's evolution. “It was a lot of corporate leaders coming together who said, ‘It’s too important for downtown’s success to be wholly reliant on one industry. We’ve got to diversify who downtown is for.’” 

There has been progress since then in the realm of arts, sports, culture, entertainment and even residential, he said. The idea of downtown as a residential neighborhood 20 years ago was far-fetched, and while downtown residential density still lags compared to other submarkets, it has now hit a milestone of more than 11,000 residents.

But even now, office space remains downtown real estate’s bread and butter, with more than 3,000 companies downtown and more than 55M SF of office space as of June 2022, according to Central Houston. Although Houston has one of the highest return-to-office rates in the country out of large cities in the U.S., it also has the highest rate of vacant office space. 

Downtown’s office vacancy is even higher than the city as a whole, at 27.7% and 23.7%, respectively, according to Avison Young’s Q3 report.

That number may be inflated by “certain properties that are not marketable,” Larson said. “They may be marketed, but they’re not marketable.” 

Kastle’s return to office analysis shows Houston’s office occupancy ranges from 43.4% to 67.6% of pre-pandemic levels, depending on the day of the week. The higher occupancy days are typically midweek, and most agree that people working from the office on a Friday is basically an anomaly. 

Parker Duffie, First Vice President on the Advisory and Transaction Services/Investor Leasing team for CBRE, said he describes downtown Houston office leasing with one word right now: “Weird.”

“You’ve got some large transactions happening, you’ve got new construction that’s certainly leasing up,” Duffie said. “But you’ve got this overall … flight to environment. The quality of the environment is what’s really appealing. You’ve got some buildings struggling downtown that have been there for a while, they’re nice, but they’re either on an island or they’re not offering anything different.” 

New office buildings with attractive amenities continue to be delivered downtown, like the 47-story, 1M SF Texas Tower that opened in December 2021.

Duffie is leasing 1550 on the Green, a 28-story, 375K SF office tower with ground-floor retail adjacent to Discovery Green, which is slated to deliver in late 2023. He also leases the Bank of America Tower, a 35-story, 780K SF building that opened in 2018 and is about 98% leased, he said.

“If you’ve got a quality building, you’re leasing,” Duffie said. 

Yet since the pandemic began, people are weary of long commutes and many businesses realized they don’t need quite as much space, leading to a “western migration” of downtown offices to the Galleria area, and Galleria area offices to Memorial.

“People are saying, ‘I’m tired of my commute, I want to [work] closer to home,’ and as the city continues to expand and grow … they don’t want to commute down to the Galleria, they don’t want to be inside the Loop,” Hartman Management senior leasing agent Ami Figg said at a Bisnow event in October. “People want accessibility and they want to be close to their families so they don’t have to spend a lot of time commuting.”

But there are two categories of Central Houston’s recovery scorecard that are higher than pre-pandemic levels, and they’re labeled “residential” and “Astros.” 

“When we look at things like entertainment, we are outperforming where we were pre-pandemic,” Larson said. “More people than ever are coming to Astros games. It helps when your team is winning, but we can look at other things ... We track utilization of green spaces downtown. Basically when the weather is good, we are over pre-pandemic levels.”

Discovery Green, the 12-acre park with an ice rink and other attractions, is drawing more people than the zoo, and more than 1 million people come downtown annually to visit Discovery Green, he said.

Tracy Vaught, owner of H-Town Restaurant Group, which includes Xochi across from Discovery Green, said while the beginning of this year was slow, the draw of sports games, plus concerts, conventions and other events, has been great for business and foot traffic.

“Hotels started being full, ballgames started back and all of that,” Vaught said. “We have done quite well … but that’s because of our unique situation in that area. If we were over by the Central Business District, where most of the offices are, it might be a totally different story for us.”

Vaught thinks being able to offer more parking would help bring people downtown. And after seeing the success of Discovery Green, she would be happy to see more green space, too. She is in favor of anything that would bring people to the street level, rather than underground in the tunnels. The tunnels have a purpose, but they are holding downtown back, Duffie said.

“You want vibrancy on the streets, you want people on the streets,” he said. 

Vaught said she thinks some older office buildings could be cleared out to make way for more parking or other development.

Central Houston is actively pursuing a number of conversions of obsolete office space into primarily residential, Larson said, adding that residential is the logical choice for conversions on a price-per-SF basis. 

Data provided to Bisnow by CBRE shows that there have been at least nine office conversions either completed or underway in downtown Houston since 2016. Of those, six were Class-B office buildings and the remaining three were Class-C, the data shows. Six are hotels, two are multifamily, and one is mixed-use. 

While hotels are recovering healthily since the pandemic began – Larson said latest numbers show them at about 90% recovered – he’s more interested in the multifamily side. 

“To grow downtown as a neighborhood remains a priority for us,” Larson said. “Residents are the ones who will walk their dogs and put eyes on the street, and create a sense of community in the neighborhood … They’ll walk down the street and see that Whataburger cup that somebody threw on the sidewalk, and will pick it up and put it in the trash can because it's their neighborhood.”

Many landlords are investing in ground-level retail, which also adds to street vibrancy and pushes downtown’s development in the right direction, Duffie said. Plus, Skanska is building 1550 on the Green right by Discovery Green, without tunnel access, which helps give downtown a community feel, he said. 

“[They’re] trying to make downtown a place where people want to be, live, work and walk,” he said.

Downtown residential is expanding at a slow but steady pace.

Absorption for downtown apartments was 99 units in Q3, according to Transwestern, and Larson said downtown is averaging absorption of 400 units a year. Out of the 42 submarkets Transwestern tracks, 23 had negative absorption in Q3, meaning more people moved out of apartment units there than moved in. The overall absorption for Houston in Q3 was 743, making downtown a significant contributor, according to CBRE.

There are currently 7,230 units with another 578 under construction downtown, the Transwestern report shows, but so far, the rent remains the highest by far of all the submarkets at an average of $2,304 a month.

“If I can take those [obsolete offices] off of the vacancy side, it’s going to improve that overall perception of vitality and the health of the district,” Larson said. “The most important land use that we continue to need in downtown is residential.”

CORRECTION, DEC. 20, 3 P.M. CT: A previous version of this article stated the incorrect job title for Parker Duffie of CBRE. The article has been updated.