InterFace Panel: Time to Rethink How We Meet Demand for Office Space
Two Riverway, an office building built in the 1980s that flooded during Hurricane Harvey, recently landed an 80,000-square-foot tenant. The deal suggests that older office product can still be relevant if it is leased to the right user.
HOUSTON — Much like the preferences of younger generations are influencing how retailers pick their locations and sizes, the whims of today’s office-using workforce significantly impact the way professional services companies view their office spaces.
This is not strictly an amenities-based trend. It goes beyond adding fitness centers, walking trails and food trucks to cater to Millennial workers. It’s an evolution of the role that office space plays in company budgets and operations.
For developers and brokers in the office sector, it means rethinking the ways in which they meet demand.
A panel of veteran players in Houston’s embattled office market addressed this trend and others during the InterFace Houston Office Forecast on Feb 1. Approximately 150 real estate professionals attended the event, which was held at the Royal Sonesta hotel in the Galleria area of the city.
Old Product Trails Trends
Houston’s office market has been hobbled by high vacancy and negative absorption as a three-year slump in oil prices has taken a toll on Houston’s energy industry. In addition, the sector also suffers from a lack of modernized product.
Panel moderator Rand Stephens, managing director at Avison Young, said the latter factor is increasing demand for build-to-suit projects in Houston, particularly for major developers that can afford them
Building on that notion, panelist Pat Hicks, founder of office investment firm Hicks Ventures, noted that pricing of Houston’s older office buildings reflects their lack of core amenities and structural upgrades. But, he contended, outdated product is not necessarily obsolete product, in terms of both leasing and investment.
“You’re always going to have people who want the newest thing on the block,” said Hicks. “But look at Manhattan. That’s a market with half a billion square feet of office space. More than half those buildings are 50 years old, if not older, and they’re mostly full. So there’s always going to be demand for different levels of product.”
Hicks also pointed to an office property in Houston: Two Riverway, a 364,000-square-foot building that was built in 1980. The asset has minimal amenities and flooded during Hurricane Harvey, but still landed an 80,000-square-foot tenant, Hicks said.
Big Users Have New Demands
Sanford Criner, vice chairman at CBRE, was among the first panelists to identify a fundamental shift in how demand for office space has evolved in recent years.
“If you look at the last major office deals in Houston, most have been met with development of new buildings,” said Criner. “That never happened during the last 35 years. So we may be at an inflection point with office buildings, where they’re shifting from warehouses for people to central parts of the operation.”
Criner listed several major companies, including Bank of America and Hewlett Packard Enterprise (HPE), that demanded build-to-suit office properties during the rollover periods in their Houston leases. He also noted that it’s become increasingly common for human resources departments to get involved with real estate decisions, suggesting those choices are having bigger impacts on companies’ images and operating budgets.
“What we think of amenities have really become essentials, and not just for Millennials,” said Criner. “From moving locations off the highway and onto the grid to placing less emphasis on cars and more on pedestrian walkability, there are just so many trends we’re only just beginning to see.”
Panelist Lauri Goodman Lampson, president and CEO of office design and architecture firm PDR, echoed Criner’s sentiment on how such new features truly reflect an evolution of how office space functions in today’s business environment.
“The nature of work has completely changed,” said Lampson. “A compelling workplace is table stakes now — if you don’t have it, you will not keep your talent and you will not attract new talent. And for companies that are embracing this, it’s very much a long-term play.”
Repositioning May Be the Future
Oil prices notwithstanding, a turnaround in Houston’s office market could rest on how quickly and efficiently the old office product meshes with the new trends in office space. In that sense, repositioning projects could help revitalize much of Houston’s office inventory.
“Investors are still very interested in Houston, despite everything that’s happened on the energy side and what that’s done to the office market,” said Chip Colvill, CEO of Colvill Office Properties, which holds roughly 16 million square feet of office space in its portfolio. “They see older buildings that have good bones but need capital and repositioning, and they’re interested in those opportunities.”
However, regardless of whether they center around making structural improvements, adding key amenities or reducing the square footage per employee, repositioning projects are very disruptive to businesses, said panelist Lampson. Many office users prefer to simply relocate. Consequently, the extent to which repositioning projects can be executed without losing tenants could come to a play an important role in determining just how long Houston’s office market woes last.
— Taylor Williams