Sugar Land's Secret To Rising Class-A Occupancy
Q4 data shows that with 92.7% occupancy, Sugar Land's Class-A office market is rising above the tide sinking other areas across Houston.
With the lowest office vacancy of Houston's major submarkets, what is Sugar Land's secret to bucking office leasing trends?
In Q4 the Fort Bend/Sugar Land submarket posted 55K SF of quarterly absorption, bringing the yearly total to 151K SF. The majority of the leasing gains occurred in Class-B properties due to the relative tightness in the Class-A sector. Rental rates are also up across Fort Bend.
"Since 2010, Sugar Land has only had positive absorption," PMRG Vice President of Leasing Michael Sieger said. As the Houston metro enters its fourth year of an oil downturn, that stat is remarkable.
Three factors are contributing to the city's strength.
Limited Product And Diverse, Smaller Tenant Base
Sugar Land is a relatively small office submarket catering primarily to relatively small tenants.
It has 3.5M SF of Class-A office with the highest occupancy in the Houston metro. Sugar Creek On The Lake, which Sieger leases, alone accounts for 15% of Sugar Land's Class-A office space.
Sugar Land also has a little more than 4M SF of Class-B product, which is 9% vacant, and 440K SF of Class-C space, which has a 7.5% vacancy rate. Sugar Land is primarily made up of smaller tenants in the marketplace, who do not leave large holes in the submarket like when the energy crisis occurred and large tenants contracted quickly.
"Sugar Land is still a smaller, newer office market that offers a variety of office/retail users options, and the rates are stable and do not tend to have large swings like some of the larger Houston submarkets," CBRE Senior Vice President Rich Pancioli said.
While the city's low volume of office space compared to other areas is certainly a factor, there is more to it than that. The city's growth in office space is a result of intense economic development and diversification.
"Sugar Land went from a one-company town to what it is now," Siegar said.
That is largely thanks to the Sugar Land Economic Development Council and the Greater Fort Bend Economic Development Council.
"The Fort Bend and Sugar Land economic development teams are actively searching for deals," Pancioli said. "No matter how confidential the deal, they'll reach out. How are they hearing this? They've got some really good feelers out there."
The city's first big deal was attracting Minute Maid to Sugar Land from the company's then-HQ in the Galleria area. In 2009, more than 300 employees moved into the 115K SF Minute Maid Building at 2150 Town Square Place in Sugar Land Town Square. The City of Sugar Land gave a $2.4M direct incentive and 100% tax abatement to Minute Maid to relocate. A similar deal was struck with Schlumberger. Sugar Land has also become home to major employers like Fluor, Houston Methodist, United Health and Tramontina USA.
"We feel like we've become an economic powerhouse with our employment of 64,600-plus jobs in the city," Robert Lung said while serving as Sugar Land's Assistant Director of Economic Development. "That's more than a 40% increase in jobs since 2012."
Lung now serves as the Director of Economic Development for Central Houston and the Downtown District
For decades, Sugar Land was tied to the Imperial Sugar Co. From a historical perspective, Sugar Land was one of Houston's microcosm suburbs, with residents rarely going to and from the city. That is now a benefit as people try to limit their commutes.
Community assets like Sugar Land Town Square, Smart Financial Centre and Constellation Field offer potential residents quality-of-life enhancements similar to those in The Woodlands, another one of Houston's strongest suburbs. Sugar Land even has its own municipal airport, perfect for corporate travel to Silicon Valley.
"The Sugar Land market has been compared to the Woodlands market, not only because of the Town Centre but also because of the neighborhoods and nice homes that can be purchased for significantly less than those closer to [the] Houston CBD," Pancioli said.
Newer schools, better school districts and amenity-rich areas are driving population growth in Southwest Houston. Sugar Land's simple formula of affordable housing, proximity to home/work relationship, amenities including both low- and high-end restaurants, bars and shopping matched with good school districts and accessibility to the rest of the city through major freeways/toll roads provides an attractive option when considering company locations.
"We have been extremely pleased with the performance of Sugar Land Town Square since we acquired it in 2013," Lionstone Investments Vice President of Asset Management Fernando Urrrutia told the Houston Chronicle. "As a mixed-use property, it has been able to excel despite less than ideal market conditions."
"Look at the two office markets with the most absorption, Sugar Land and The Woodlands," Sieger said. "They're microcosms for people who don't want to drive all the way into the city. No one wants to have to commute."
CORRECTION, JAN. 8, 5:10 P.M. ET: Robert Lung's current role as Director of Economic Development for Central Houston has been clarified.