Of­fice mar­ket is show­ing signs of get­ting out of its funk

Houston Chronicle - - TEXAS INC - By Kather­ine Feser kather­[email protected] twit­ter.com/kfeser

Hous­ton’s com­mer­cial real es­tate mar­ket had a strong show­ing on all fronts ex­cept the of­fice sec­tor in 2018.

The re­gion’s re­cov­er­ing of­fice mar­ket, how­ever, gained mo­men­tum in the sec­ond half of 2018, and Hous­ton’s con­tin­ued job growth should push de­mand for of­fice space into neu­tral or pos­i­tive ter­ri­tory in 2019, Avi­son Young realty bro­kers said last week at a me­dia roundtable.

“We’ll see the of­fice mar­ket con­tinue to im­prove — it’s just a ques­tion of how fast,” said Rand Stephens, Avi­son Young prin­ci­pal and manag­ing di­rec­tor of the Hous­ton of­fice.

While com­pa­nies are leas­ing of­fices in new build­ings in a bid to at­tract top em­ploy­ees, they fre­quently re­duce their to­tal foot­print in the process. The new of­fices have more ef­fi­cient lay­outs with shared work ar­eas and state-of-the-art build­ing ameni­ties such as con­fer­ence rooms, gyms and restau­rants.

In Hous­ton and na­tion­ally, com­pa­nies are leav­ing be­hind more space that they’ll oc­cupy as the square-foot-per-per­son ra­tio shrinks. Vin­son & Elkins, for ex­am­ple, will take less space for its down­town law of­fices un­der con­struc­tion at 801 Texas.

“It’s not a new trend, but it con­tin­ues,” Stephens said. “That com­pli­cates a re­cov­ery as well.”

The of­fice mar­ket is frag­mented based on the lo­ca­tion and age of prop­er­ties, said Avi­son Young’s prin­ci­pal and ten­ant rep­re­sen­ta­tive, Char­lie Neuhaus. Land­lords of older down­town build­ings are un­der pres­sure to com­pete.

“Own­ers that are hold­ing older vin­tage build­ings are go­ing to have to fight it out to at­tract ten­ants to move into those as­sets,” Neuhaus said.

Older build­ings in cer­tain re­gions could be­come can­di­dates for re­de­vel­op­ment into other uses such as ho­tels or res­i­dences as in­vestors look to reap tax ad­van­tages in newly cre­ated Op­por­tu­nity Zones, bro­kers said.

For 2018, of­fice ab­sorp­tion im­proved to neg­a­tive 67,428 square feet, up from neg­a­tive 1.1 mil­lion square feet in 2017, ac­cord­ing to Avi­son Young. The En­ergy Cor­ri­dor was high­lighted as a re­gion that will con­tinue to re­bound as com­pa­nies seek space near em­ploy­ees’ homes.

With pro­jected job growth of 70,000, Hous­ton’s out­look for ab­sorp­tion of of­fice space is fore­cast to be flat or pos­i­tive in 2019, Avi­son Young said. The lo­cal mar­ket had a di­rect va­cancy rate of 16 per­cent at yearend.

In the in­dus­trial sec­tor, de­mand from both re­tail­ers and ex­porters of petro­chem­i­cal prod­ucts stem­ming from the shale boom con­trib­uted to a low year-end va­cancy of 4.9 per­cent, Avi­son Young said.

Of­fice sales re­cov­ered in 2018 and will be stronger in 2019, said Dar­rell Betts, a prin­ci­pal in Avi­son Young’s cap­i­tal mar­kets group. In­dus­trial in­vest­ments were down in 2018 as in­sti­tu­tional own­ers held on to their prop­er­ties. Prices for apart­ments rose, es­pe­cially in strong re­gions such as Clear Lake, The Wood­lands and King­wood.

More than 11 mil­lion square feet of in­dus­trial space is un­der con­struc­tion across the Hous­ton area. About 7.7 mil­lion square feet of in­dus­trial space was ab­sorbed in 2018, Avi­son Young said.

“I’m not sure that we’ll ob­tain that this year,” Avi­son Young prin­ci­pal Bob Berry said.

CBRE

In one of the big­gest leases of 2018, McDer­mott In­ter­na­tional leased En­ergy Cen­ter Five. The com­pany will con­sol­i­date sev­eral lo­ca­tions to the 524,00-square-foot tower in a move that will en­hance col­lab­o­ra­tion and pro­duc­tiv­ity among its em­ploy­ees, while driv­ing ef­fi­ciency and cost sav­ings for the com­pany, McDer­mott In­ter­na­tional said.

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