New Tenant At Enclave Place Points To Houston's Office Recovery

After sitting vacant for three years after its 2015 delivery, Enclave Parkway signed a single-tenant lease with Transocean Ltd., a Switzerland-based offshore drilling company.

The 11-story facility is in Houston's Energy Corridor, and tells the story of Houston's cycling CRE market — it was one of many high-end office buildings started when times were exceptional, and like most of Houston's office product, faced difficulty signing leases when oil bottomed out.

Is this lease a harbinger of better days for the Energy Capital of the World's real estate?

The 17-year agreement is for the entire 300K SF, Class-A office building at 1414 Enclave Parkway, according to a statement from Atlanta-based Piedmont Office Realty Trust, which owns the building.

Transocean also leases 255K SF at 4 Greenway Plaza, which serves as its U.S. headquarters. It renewed that release in 2017 and it expires in 2023, according to the Houston Business Journal, which first reported the Enclave lease. 

Piedmont Office, which owns the building, said the offshore drilling company will relocate its U.S. headquarters facility when the Enclave lease commences in July. 

JLL's David Bale and Louie Crapitto represented the tenant. Colvill Office Properties' Damon Thames and Connor Saxe and Piedmont Office Realty Trust's Damian Miller represented Piedmont. 

The delivery of Enclave Place came in the headiest days of spec office development in Houston. After the price of oil slipped, areas like the Energy Corridor and the Central Business District struggled with high vacancy rates. In the third quarter, the market noted the first decrease in vacancy for the first time in nearly three years.     

Bisnow spoke with brokers about if a new deal from an energy services company to fill the entire building with a long-term lease signifies a return in the office market. 

Marcus & Millichap Senior Associate Keith Lloyd

What does this deal tell you about Houston's office market?

"It is always positive news when a transaction closes in the Energy Corridor/I-10 West submarket of Houston, which has the highest vacancy rate in the city. Transocean, who is vacating approximately 255K RSF in Greenway Plaza, appears to be expanding by approximately 20% — always a good sign that companies in the energy business are again growing. Hopefully, the new lease is a harbinger of more to come as tenants plan for the future." 

Do you expect more deals of this size or from the energy sector?

"As leases approach expiration, tenants will be weighing all their options as they explore a vast number of opportunities in the Energy Corridor. We believe over the next 12-18 months there will continue to be more announcements of tenants inking new or renewed leases." 

Does this signal a change in the office marketplace? 

"In some cases, tenants may just be trading places. Notwithstanding, from an investment perspective, we are seeing strong buyer activity from both local as well as regional and out-of-state investors wanting to place their monies in office investments. With Houston’s vibrant economy, oil in the mid-$70s and a city that always bounces back from energy downturns, we are very optimistic."

Avison Young Principal and Managing Director Rand Stephens 

What does this deal tell you about Houston's office market?

"A transaction of this size is very positive for the Houston office market and the Energy Corridor submarket in particular. With a recovery underway in the energy industry, we’ve predicted that the office market had hit bottom and will begin to recover. This is evident in the increase in year-over-year transaction volume as well as the size of transactions. Also, positive absorption is a key indicator of a recovery and there was positive absorption in the office market citywide in the third quarter. Job growth over the trailing 12 months is excellent and is the primary contributor to the improving fundamentals of the office market." 

Do you expect more deals of this size or from the energy sector?

"Yes. I expect to see more large office leases completed, particularly as the offshore exploration business picks up the pace. The offshore energy business is a massive generator of technical jobs and those people need office space. The Energy Corridor is still the epicenter for exploration and production companies as well as the oilfield service companies that work on their projects; so, this bodes very well for the office market in and around the Energy Corridor which includes the entire west side of Houston."

Does this signal a change in the office marketplace? 

"Yes, it is a signal, as well as strong evidence of the recovery we expect, considering the turnaround in the upstream energy industry and the excellent job growth as a result."

CBRE Director Robert Kramp

What does this deal tell you about Houston's office market?

"This move is about talent and our current high-skill talent crunch. Expect to see more moves like this one because it is a result of a recent shift of oil service companies viewing their office space as an asset in order to attract and retain their employees rather than a liability, which they have historically done.

Energy services are competing with their large oil and gas clients for some of the top, most experienced talent, which according to CBRE data demand a quality work environment and the latest amenities such as focus rooms, outdoor space, on-site fitness centers, concierge services and even easy meeting catering." 

NAI Partners Senior Associate Nick Terry

What does this deal tell you about Houston's office market? 

"It is yet another indicator that the struggling market is trying to enter recovery. At some point in the Houston office market, the effects of increasing commodity pricing, record job growth and strong national economy have to translate into positive absorption, which we saw in Q3 '18. While there is a long way to go to reach equilibrium, it’s a noted improvement.

The flight to quality continues. Tenants still have the upper hand in negotiations. Relocating to a newer building allows them to shrink their footprints with building efficiencies and negotiate aggressive rates well below quoted rents which have a combined reduction in occupancy costs." 

Do you expect more deals of this size or from the energy sector? 

"I expect more deals of all sizes from the energy sector. After a few years of below-average activity and right-sizing in the sector, there is pent-up demand that will continue to slowly release itself in the market."