Q2 2012 Houston, Texas Office Submarket Trends

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Q2 2012 Houston, Texas Office Submarket Trends

West: The Energy Corridor/Westheimer-Westchase

  • This submarket, to the near west of the CBD, is anchored by the stretch of I-10 (Katy Freeway) more or less halfway between the CBD and west suburban Katy.
  • Houston’s Energy Corridor, which includes the Westheimer-Westchase submarket and the Katy Freeway market (see below), has enjoyed soaring demand from expanding oil and gas sector and related companies.
  • The two-year span 2008-2009 saw the completion of 1.0 million square of new construction in Westheimer-Westchase.
  • No space has delivered since.
  • Net absorption for first half 2012 absent new supply was positive 145,000 square feet. The second quarter total was 118,000 square feet.
  • A new start. The 12-story, 300,000 square foot speculative Briarpark Green project has broken ground at 3141 Briarpark Drive, according to industry sources. Jones Lang LaSalle anticipates a September 2013 finish.
  • More. As of July, the $75 million project from Granite Properties had not yet secured its first tenant, The Houston Chronicle reported at the time.
  • In addition, 2.5 million square feet in seven general purpose projects remain in planning and proposal stages.
  • Of that total, 1.8 million belong to four phases of Thomas Properties Group’s City West Place development proposed for a site at Beltway 8 and Westheimer.
  • Phillips 66 executed a 209,482 square foot lease at Pinnacle Westchase (3010 Briarpark) during the second quarter, reports Jones Lang LaSalle. The building is now 100% leased.
  • Vacancy ended the second quarter at 12.3%, down 90 basis points for the period, down 190 year-over-year. Second quarter average asking and effective lease rates were $22.79 psf and $18.59 psf, down 0.2% and 0.3% for the period, down 0.4% and 0.2% since year-end in the wake of gains of 2.7% and 3.1% in 2011.
  • Outlook. Ongoing improvement is expected as demand remains positive. The effect of 3141 Briarpark, the first spec project built here in a while, bears watching.
  • “Companies seeking big blocks of quality product at the heart of the region’s energy nerve centers face the toughest challenge,” states Studley, Inc.

West: The Energy Corridor/Katy Freeway

  • This large submarket, adjacent to Westheimer-Westchase to its north and northwest, straddles I-10 (Katy Freeway) on Houston’s west side. The West/Katy Freeway submarket is the busiest of the west side submarkets.
  • Arising from the latest energy sector boom, fully 2.9 million square feet completed construction here in 2009—in the wake of nearly a million the year before.
  • With vacancy high, no space delivered in 2010 or 2011.
  • Activity has picked up, however. Four projects with a combined total of 997,000 square feet were under construction per the date of this report. In one project 103,000 square feet will deliver this year.
  • The latest added to the list of projects underway is the 672,000-square-foot two-tower Shell Woodcreek Office Campus at I-10 and N. Dairy Ashford Road, which broke ground in July. Hines is the developer. A completion date was not specified.
  • The six-story, 103,000-square-foot CityCentre III from Midway Companies and LaSalle Investment Management is underway at I-10 and Beltway 8, west Houston, for completion this October.
  • More. The building was 44.3% preleased as of July, Houston Business Journal reported at the time.
  • Reis reports a June 2012 start for the same-size CityCentre IV. Completion is scheduled for May 2013.
  • The 325,000-square-foot headquarters building for Nexen Petroleum broke ground in November 2011 at I-10 and Bunker Hill Road. A completion date was not specified. Nexen will relocate from Plano (the Dallas area). MetroNational is the developer.
  • More. According to a recent report in the Journal, Nexen will occupy 250,000 square feet.
  • A large volume of space is planned, some with groundbreaking imminent per the date of this report, as follows:
  • A January groundbreaking is planned by MetroNational near the Nexen facility for a 14-story 331,000-square-foot headquarters for Murphy Exploration and Production, Murphy has preleased 173,000 square feet, as reported by the Journal.
  • A January 2013 start is planned for the 228,000-square-foot spec Parkway Central (a.k.a. 8 West Centre) at Beltway 8 and Kempwood Drive, west Houston. Completion is planned for January 2014. Core Real Estate is the developer.
  • An August 2012 start is planned for the $50 million, six-story, 245,000-square-foot Energy Crossing II at I-10 and Highway 6, as reported by Texas Real Estate Center (TREC). Atwood Oceanics Inc. has preleased 82,000 square feet. A November 2013 move-in is planned. Lincoln Property Company is the developer.
  • Netherlands-based Stena Realty Group will build 350,000 square feet in two 175,000-square-foot Class A buildings (a.k.a. the Woodbranch Development) at Woodbranch Parkway and Wickchester Lane.
  • More. Groundbreaking for the first building is expected for the first quarter of 2013, TREC reported in June—”with or without any signed tenants,” according to the Journal. Completion in early-to-mid 2014 is expected.
  • An August 2012 groundbreaking is expected for the speculative 17-story, 450,500-square-foot Energy Tower III at I-10 and Kirkwood, according to industry sources. Mac Haik Realty is the developer. The Journal reports a January 2014 completion date.
  • A September groundbreaking is expected for the 20-story, 546,000- square-foot Energy Center III at 935 N. Eldridge Parkway, Reis reports. Completion is scheduled for September 2014. Trammell Crow Company and PREI are co-developers of the $150 million-plus spec project.
  • More. “The first phase of the development will include up to 1.5 million square feet of office space, ready in 2014,” the Journal reported in July.
  • More. 594,000 square feet have been proposed all told for buildings IV and V in the Energy Center complex.
  • Wile Interests and Stream Realty are planning a 200,000-square-foot Class A building on the southeast corner of I-10 and Greenhouse Road. “Stream Realty expects to break ground later this year once the building is 40% preleased,” the Journal reported in July.
  • More. “Tenant discussions with oil and gas related companies are under way.”
  • Skanska USA Commercial Development Inc. has purchased a 21-acre redevelopment site at 15375 Memorial Drive, TREC reported in March. The existing building will be razed; Class A office space will rise in its place.
  • Including the above-cited projects, Reis reports 4.6-million-square- foot of competitive office space planned and proposed for this submarket.
  • Second quarter leases as reported by Studley, Inc., include energy consulting firm WorleyParsons’ for 130,282 square feet at the Park Ten business park, Sasol North America leased 83,960 square feet during the quarter at 900 Threadneedle and Atwood Oceanics committed to 82,000 square feet at 15021 Katy Freeway.
  • Jones Lang LaSalle reports a 96,000-square-foot lease by Cobalt International Energy at 920 Memorial City Way.
  • First half 2012 net absorption alongside no newly delivered supply was strong at 503,000 square feet. The total for second quarter was 335,000 square feet.
  • Vacancy ended the quarter at 14.3%, down fully 180 basis points from the quarter before, down 390 year-over-year. Mean asking and effective rents ended the quarter at $23.10 psf and $19.24, up 0.6% and 0.8% for the period, up 0.9% and 1.2% since year-end following gains of 0.8% in 2011 for both.
  • Outlook: The new spec construction activity underway and planned is the main story here. While positive net absorption is expected for the period ahead, the vacancy rate is projected to increase to about 16.0%, where it should remain, more or less, for a while.
  • Gains of 1.6% and 2.2% are forecast for the mean asking and effective rents for 2012 all told. Incremental increases in growth rates should follow.

Close-in West/Galleria-West Loop; nearby

  • With 26.2 million square feet, the Galleria West-Loop North submarket (an area referred to generally as Uptown), located to the near west of downtown (between downtown and the Energy Corridor), is the second largest metrowide after the CBD.
  • For sale. Hines REIT Properties LP has placed the 1.4-million-square- foot, 30-year-old “iconic” Williams Tower at 2800 Post Oak Boulevard up for sale, GlobeSt.com reported in August. The building is reported leased at more than 95%. See Transaction Analytics for more information.
  • Like downtown, this submarket benefitted from the recent spillover of energy sector tenant demand from the Energy Corridor.
  • No space has completed construction here since 38,000 square feet delivered in June 2009.
  • Activity, however, has increased. Reis reports 614,200 square feet underway in two projects, as follows:
  • Skanska started construction in November, “without a signed tenant,” on its 20-story, 302,000-square-foot 3009 Post Oak office tower. Reis cites a November 2012 planned completion date. The building will cost $60 million to $90 million to develop, it was reported.
  • The 312,000 square feet BBVA Compass building, named for its lead tenant, at 2200 Post Oak Boulevard, began in June and will finish in April 2013.
  • TIAA-CREF is planning the 400,000-square-foot Tower 5 @ Four Oaks Place (1550 Post Oak Boulevard). The project has been in the works since 2007.
  • 312,000 square feet are planned all told for phases II and III of the BLVD. Place mixed-use project at 1800 Post Oak Boulevard.
  • Including these, Reis reports 1.4 million square feet in planning or proposal stages in five projects.
  • First half 2012 net absorption was negative 117,000 square feet. The second quarter total was negative 274,000 square feet.
  • Vacancy ended the quarter at 13.2%, up 110 basis points for the period, down 40 year-over-year. Second quarter average asking and effective rents were $27.02 psf and $23.73, each up 0.7% for the period, up 1.6% and 1.8% since year-end on the heels of gains of 1.2% and 1.3% in 2011.
  • Outlook. Strong positive net absorption during the second half of the year should offset the new supply scheduled to deliver during the fourth quarter. Vacancy is expected to close 2102 at 12.9%. Gains of 2.3% and 2.1% are projected for the mean asking and effective rents for the year. Additional strengthening should follow.

Downtown Houston

  • The 37.0-million-square-foot Houston CBD submarket, in which development was minimal for years, faced a recent increase in construction due in part to the overflow of energy sector demand from the Energy Corridor markets to its west.
  • In 2010-2011 1.8 million square feet delivered in two new towers, as described below.
  • Total first half 2012 net absorption was 11,000 square feet. The second quarter total, however, was negative 185,000 square feet. Moderate positive activity is expected for the remainder of the year.
  • The latest delivery, occurring in February 2011, was the $200 million, 46-story, 972,500-square-foot LEED-Platinum-certified BG Group Place (formerly MainPlace) at 811 Main Street. Hines and California Public Employees’ Retirement System (CalPERS) partnered in the development.
  • Leasing. After committing to a 164,000-square-foot lease in October 2010, BG Group expanded its occupancy in the building to 354,000 square feet. KPMG LLP also has taken space in the building. Cushman & Wakefield recently reported the building “mostly leased with much of the occupancy taking place by first quarter
  • 2012.”
  • The previous completion, coming in June 2010, was the 845,000- square-foot Hess Tower at 1501 McKinney Street, 100%-occupied by Hess Oil in the third quarter of 2011. The space serves as the firm’s new regional headquarters.
  • Sold. In what was described at the time as the biggest sale in the history of the Houston office market, Hess Tower sold in December for $442.5 million ($532 psf, also a record). Toronto-based H&D REIT acquired the property from and Trammell Crow Company and PREI.
  • No projects were under construction in the Houston CBD per the date of this report. No significant starts were pending.
  • Reis reports one planned project—the 250,000-square-foot Ballpark Place at 400 Crawford Street. The project was first proposed more than a decade ago. A start date was not specified.
  • “Hines is on the record saying the surface parking lot it has owned for years on the downtown block bounded by Main, Texas, Fannin and Capitol is being held for future development,” Houston Business Journal reported in March. According to a Hines executive, a project at the site was “not imminent” at the time.
  • Exxon-Mobil’s 1.2-million-square-foot building at 800 Bell Street, now up for sale, “is the wild card in the CBD market,” reports Studley, Inc., Exxon-Mobil is scheduled to depart in 2015 to take up residence in its new north Houston campus, now under development.
  • More. Potential buyers of 800 Bell have “time to consider the highest and best use for the property. If the CBD maintains its current momentum and rents reach a certain level, redevelopment could be feasible.”
  • Kinder Morgan’s planned move into 1000 Louisiana Street, which it recently acquired, leaves a 222,000-square-foot block of sublease space at One Allen Center, reports Studley, Inc.
  • Second quarter leases include a 163,950-square-foot deal by Chevron at 1600 Smith Street (a.k.a. Continental Center I), reports Studley, Inc. Independent oil and gas company Rosetta Resources Inc. leased 108,565 square feet at 1111 Bagby Street (a.k.a. Heritage Plaza) during the quarter. Constellation (formerly MXEnergy) committed to 95,000 square feet at 1221 Lamar Avenue. And, 81,821 square feet were leased by independent energy company Halcon Resources Corporation at 1000 Louisiana Street.
  • Vacancy closed the first quarter at 10.9%, up 50 basis points for the period, same as second quarter 2011. Asking and effective average lease rates for the quarter were $32.47 psf and $27.83 psf, up 0.1% and unchanged for the period, up 1.4% and 1.6% since year-end in the wake of gains of 3.1% and 3.3% in 2011.
  • Outlook. Reis expects modest positive net absorption over the remainder of the year to contribute to a 10 basis-point decrease in the vacancy rate, to 10.8%. Gains of 2.4% and 2.6% are projected for the asking and effective average rents for the year.

North Suburban/The Woodlands; Other

  • The Woodlands and northwest suburban areas also were busy in the recent past, a reflection of strong expansion generally.
  • In 2009 195,000 square feet completed construction in the North-Woodlands-Conroe submarket followed by 310,600 square feet in 2010 and 68,000 square feet in 2011.
  • Per the date of this report, 554,000 square feet in three projects were under construction.
  • Only one, the 20,000-square-foot Alden Bridge Office Development in The Woodlands, is scheduled to deliver in 2012. Reis expects a November finish.
  • The 300,000-square-foot Research Forest Lakeside Building 4 broke ground in March in The Woodlands. Reis expects completion in March 2013. JD Warmack LP is the developer. Six of the building’s 12 floors will be occupied by Talisman Energy, TREC reported in June.
  • More. As reported by TREC, Building 4 is part of Research Forest Lakeside, a
  • 10-building office park on 76 acres that will total nearly 1.8 million square feet at completion.
  • Following in June 2013 will be the 234,000-square-foot 3 Waterway, also in The Woodlands. In 2010, 232,364 square feet completed at Waterway Square.
  • The eight-story, 195,227-square-foot One Hughes Landing, the first office building at The Howard Hughes Corporation’s Hughes Landing at Lake Woodlands, is expected to begin this fall with completion planned for the fourth quarter of 2013, Business Wire reported in July.
  • Exxon-Mobil. The major story for this submarket and one of the big stories for metro Houston itself is the 385-acre, 4-million-square-foot corporate campus for Exxon-Mobil in an area south of The Woodlands at I-45 and Hardy Toll Road. Site work has begun.
  • The development, to be completed by 2015, is expected to drive large-scale development in the surrounding area and in
  • The Woodlands.
  • “Oil and gas firms desiring a presence near the new Exxon-Mobil campus “are flocking to the Woodlands,” stated Studley, Inc., in its first quarter report.
  • The 1,800-acre, $10 billion Springwoods Village master-planned community will be developed nearby. Currently in the site preparation phase, the development is expected to host 8.5 million square feet of office space along with major retail, residential and hotel components. Coventry Development Corporation is the master developer.
  • During first half of 2012 142,000 square feet of positive net absorption were achieved. The second quarter total was 97,000 square feet.
  • Second quarter vacancy was 14.3%, down 240 basis points from a quarter earlier, down 330 year-over-year. Mean asking and effective lease rates for the latest quarter were $21.01 psf and $17.52, up 0.5% and 0.6% for the period, up 0.7% and 0.8% since year-end on the heels of 2011 gains at 0.8% and 1.0%.
  • Outlook. Reis expects a modest setback for the remainder of the year all told as absorption runs slightly negative, 20,000 square feet of new space arrive on line and the vacancy rate rises above 15.0%. Gains of 1.4% and 1.9% are forecast for the mean asking and effective lease rates for the year.
  • The submarket likely will be transformed by the new Exxon-Mobil campus. The Woodlands and nearby areas are expected to see large volumes of related construction and strong related demand from energy sector companies, some of which is already apparent in new leasing at Lakeside Research Park.

Other/North

  • A major project. McCord Development Inc. is planning the 3,635-acre, $5-billion-plus Generation Park corporate park for a site to the southeast of George Bush
  • Intercontinental Airport, as reported by the Journal. A total of 30 million square feet of office, industrial, medical, retail, hospitality and multifamily space on 207 development sites are planned.
  • More. Pending tenant commitments, Phase I will include two tiltwall office buildings with a combined total of 250,000 square feet.