Rock On, Downtown
Houston’s CBD is one of the strongest in the country, with below-average vacancy and above-average rent growth. (Feel free to call your friends in Cleveland and trash talk.) Does that mean the submarket’s new development is justified?
JLL research manager Graham Hildebrand (here with his wife Julie) says Downtown is still Houston’s preeminent address. Companies like the central location, reputation, and iconic architecture, which has driven our vacancy down to 6%. (Many primary markets are over 10%.) That’s even better than the Energy Corridor and Galleria, despite all the buzz they get. (As Teddy Roosevelt said: "Walk softly and carry a big tenant list.") We’re third in the country for rent growth in the last 36 months (17.7%) and lead the nation since 2005 (69.8%). We’re up to $44.50/SF gross Downtown, $10 more than Houston’s Class-A average.
Four buildings totaling 2.2M SF have been announced for immediate development in the CBD (including the 800 Bell redesign). Houston has the second-highest rate of development to existing supply (nearly 10%) in the country. In fact, 26% of all Houston’s starts in 2014 and beyond are in the submarket. (Only The Woodlands, with 36% of all projects, is higher.) Graham believes they’ll do well. “There’s always going to be demand Downtown,” he says. There’s a reason those properties get primo rents, and he says buildings that come online are always snapped up. But the abundance of construction will push the submarket from a landlord-favorable market to neutral in 2016.
The investment market is blowin’ and goin’ too—2.2M SF traded Downtown in 2013, with core assets averaging 5.3% cap rates. (That’s the ninth-highest in the country; San Francisco leads the US at 3.2%.) JLL managing director Rudy Hubbard (here with Kevin McConn) says large-scale transactions were one of the four major themes last year. Our largest five sales accounted for 63% of overall volume. Another hot trend—Class-A office transactions in Houston’s six primary submarkets increased 54%. Based on the number of BOVs he’s done in the past 90 days, Rudy expects to see a lot of $20M to $50M deals coming to market this year.