Houston Office Market, CBD Experiencing a Renaissance
In recent months, a renaissance in the Houston’s urban core, paired with a flight to quality and focus on sustainable design, has created a perfect storm for the metro’s office sector.
This revival has been combined with a renewed focus on living and working in Houston’s Central Business District (CBD), which has simultaneously driven a resurgence in both retail and mixed-use developments.
Downtown Houston’s burgeoning multifamily market is one of the key drivers in Class A office development. Since 2013, downtown Houston has seen 3,355 new multifamily units hit the market. And according to industry estimates from the midway point of 2017, the multifamily market will continue to grow significantly — as much as 40 percent — by the end of this year.
These trends, paired with a 6 percent increase in construction of new hotels, have created greater demand in the marketplace for mixed-use developments that offer diverse tenant mixes, including high-end retail and dining options.
A Flight to Quality
These shifting preferences among residents and employees within the city’s urban core has prompted a flight to high-quality, modern and energy-efficient buildings, as more tenants look for office space in Class A developments that boast top-of-the-line amenities.
Over the last year, Houston’s trophy office buildings have captured 64 percent of deals larger than 20,000 square feet, despite accounting for only 36 percent of the market’s total inventory.
Although CBD trophy buildings command rents that are on average 28.8 percent higher than those of office properties in other submarkets, recent transaction trends show that tenants are taking advantage of lower net effective rates in higher-quality spaces.
In fact, the leasing activity for assets built or renovated between the years 2000 and 2017 has been 92 percent higher than that of older developments, according to data from industry sources.
Earlier this year, Charlotte-based Bank of America announced plans to leave its namesake tower in Houston’s CBD and consolidate its market footprint. This move came on the heels of the firm’s signing of a 210,000 square-foot lease to anchor the nearby Capitol Tower, a 35-story, 754,000-square-foot office development. Construction of this building, which also welcomed Quantum Energy to its tenant roster with a 32,000-square-foot lease in late November, is expected to be complete by 2019.
Bank of America’s deal for this Class A property represents just one example of how amenity-rich office buildings with ground-floor retail are garnering the greatest interest and leasing activity from prospective tenants.
A Leader in Sustainability
In 2017, Houston ranked among the top five cities nationwide in terms of its volume of green office space. For some, this comes as no surprise, considering that certified green buildings accounted for 53 percent of the city’s overall office inventory at the end of 2016.
These figures speak to yet another emerging trend among office-users in Houston — they are increasingly looking for office product in sustainable spaces. As a result of this trend, those consumers are beginning to see a number of new benefits, including the establishment of a healthier work environment, as well as better overall energy efficiency and higher cost savings.
Earlier this year, Houston’s Energy Corridor gained its first LEED Platinum office campus with the certification of the building at West Memorial Place. Designed by Atlanta-based architectural firm HOK, the two-tower development includes sustainable features such as waste diversion and energy recovery, and consumes 30 percent less energy than typical office buildings of it size.
As more tenants seek office space in new, sustainable buildings, developers in Houston are looking for innovative ways to implement green amenities in building design, including the introduction of parks and urban green spaces. At the aforementioned Capitol Tower development — considered by many to be the CBD’s latest trophy asset — this came in the form of a sustainable SkyPark.
The 24,000-square-foot rooftop greenspace and courtyard is available to all building tenants and is irrigated by a 50,000-gallon rainwater harvest cistern. In addition to promoting efficient use of resources, the Skypark serves as a symbol of the emerging trends that are shaping influential preferences among Houston’s office users.
As oil prices — which at the time of this writing were trading between $55 and $60 per barrel, according to NASDAQ — continue to stabilize during the new year, Houston’s office-using tenants will continue to seek amenity-rich, flexible office environments where they can grow and thrive.
Based on these prevailing consumer and macroeconomic patterns, we expect to see strong investment in Houston’s office market, particularly in its Class A assets, throughout the course of 2018.
— By Matt Damborsky, executive vice president, Skanska USA. This article first appeared in the January 2018 issue of Texas Real Estate Business magazine.