The Four Buzzwords Keeping Downtown Houston Humming
Sublease space, co-working, flight to quality and redevelopment. Since the peak oil price of June 2014, it seems that is all Houston's Downtown office market can talk about. A panel of Houston's top office executives broke down what each factor means for the city going forward.
The Houston Central Business District has the highest concentration of sublease space in the Houston area — and the nation. JLL Research shows after Enbridge added 294K SF at 1100 Louisiana St. during the second quarter of this year, the total sublease inventory in the CBD topped 2.5M SF, or 23% of the indirect market.
Cushman & Wakefield Executive Vice Chairman Tim Relyea has been fighting back against the glut of sublease space. He and his team have worked deals to remove hundreds of thousands of square feet from the sublease market, like Shell's space downtown, which totaled roughly 300K SF.
But Relyea and his team are fighting an uphill battle.
"We're going to see more sublease space, it's not finished," Relyea said. "There will be more companies that cut back, we can't be shocked by that. It's a trend in town."
But there is still plenty of room for optimism. Relyea thinks we will start to see a decrease in sublease inventory soon thanks to increasing transaction volume and lease expirations becoming direct vacancy.
Flight To Quality
"In a market this soft, tenants can trade up," Midway CEO Jonathan Brinsden said. Houston's abundance of sublease space has created even more opportunity to do so.
According to Brinsden, Downtown's flight to quality is being differentiated by age. There is the stock built in the 1980s and then there is brand-new product. Brinsden has seen the market react differently to each, and he thinks that is a major factor driving redevelopment. He is seeing a lot of landlords reposition buildings to actively compete.
Understanding Downtown Houston's past is key to understanding its current redevelopment trend. Stream Realty Vice President Craig McKenna said that since 2006 there has been a big run-up in rental rates, well in excess of what landlords expected. That made it easy to not reinvest in buildings. Additionally, much of Downtown's office inventory is quickly approaching 40 years old.
"Those two factors have brought us to this point," McKenna said. "Now is the time to redevelop or sell it to someone who will."
The advantages of redevelopment can be significant. Buildings that are well located, with efficient floor plates and that have just executed significant redevelopment will take an outsize portion of leasing, according to McKenna.
Major redevelopments are well underway at the exact type of properties he mentioned. Allen Center, Houston Center, 700 Louisiana (Bank of America Center), 708 Main and the Carter Building are all in the process of a face-lift.
Co-working has received plenty of attention nationally, but in Houston, it has been a slower process.
"We're just starting to see the beginning of co-working," Transwestern Vice President Tyler Garrett said.
WeWork's stated goal is to achieve 3% of Downtown Houston's total office market, roughly 1M SF. With only one 86K SF space Downtown, the co-working provider is just getting started. At Serendipity Labs, work is on hold as Esperson's owners look for a buyer.
The down market is partially to blame for the slow start. Garrett said many co-working providers in Houston are going through abatement periods. In other parts of the country, where the office market is much tighter, co-working is having more success. With so much sublease and direct space available, co-working providers are having to get very competitive.
For Garrett, the question is how co-working will perform when Downtown Houston moves past its current struggles. No one has an answer to that, but there have been encouraging signs.
Houston has been lucky in its current down market. Each of the four factors is helping Houston to become a stronger market in the long run. When combined with the work being done on residential, above-grade retail and transit systems, Downtown Houston has been vastly improved this cycle.
"Even though statistics will show you vacancies, Downtown Houston has become a much better place to work and live," Garrett said.