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Mixed-Use Settings Bolster Office Prospects in Texas

Marathon-Oil-Houston

Pictured is the new office headquarters building of Marathon Oil Co. at CityCentre in Houston. The company conducted a citywide search before landing on this site.

By Taylor Williams

The COVID-19 pandemic has cast a shadow of uncertainty on both the short- and long-term fates of many office buildings, but mixed-use developers in Texas are hardly reluctant to continue to include this use in their projects.

Philosophies behind mixed-use projects vary in terms of which components lead and which ones follow. Some developers view retailers and restaurants as the connective tissue that dots the networks and thoroughfares and that creates the walkable experience.

Others see residential as the nucleus of the project that from the beginning provides critical mass and a user base for the retail and restaurant tenants during non-working hours. But in either case, the office use remains an important piece of the puzzle as a driver of traffic to retail during the nine-to-five window and as an impetus for leasing a unit at a nearby residential building.

Overall Uncertainty

No mixed-use developer professes to know when society will officially deem office buildings ready for re-occupancy, or the extent to which many large office users will continue to rely on complete or partial remote-work programs. But they remain bullish on the property type as it exists within larger projects that incorporate other key uses — for reasons both old and new.

In terms of pre-pandemic logic, some real estate professionals see retail and restaurant uses as major draws in driving office leasing that are very much on the mend.

“Demand for adaptive reuse, boutique and creative office throughout walkable mixed-use neighborhoods appears to remain high,” says Barry Hand, principal in the Dallas office of global architecture firm Gensler. “In addition, as firms consider long-term models that involve shared time at home and in the office, mixed-use developers are looking seriously toward satisfying the appetite for increased open spaces and parks for residents and office workers.”

Looking at the question of office usage through a post-pandemic lens, developers surmise that firms will now want to lease space in buildings with a nearby residential use. The reasoning is simple: Office users have grown accustomed to work-from-home regimens over the last year and want to be able to offer at least some of their employees the chance to have a short, drive-free commute.

Since the pandemic began, several studies have been conducted that show working from home to generally be more productive, meaning that an offsite program affords employees more time to focus on core tasks rather than dedicating time to commutes or conference calls and meetings.

One such study from September 2020 by Apollo Technical, an Atlanta-based IT & engineering staffing agency, found that on average, those who work from home spend 10 minutes less per day being unproductive, work one more day a week and are 47 percent more productive. Another survey by Stanford University found that remote workers were 13 percent more productive compared with their office worker counterparts and that 43 percent of American workers would prefer to work remotely after the pandemic subsides.

However, productivity and ingenuity are two very different metrics of workplace performance. In that sense, some mixed-use developers remain steadfast in their belief that teams of employees in certain professions need to be physically together in order to maximize their creativity and innovative thinking. Such a notion is difficult to quantify, but then so are many of the consumer behavior patterns that guide real estate development.

“Teams have proven they can do the vast majority of what they do working remotely, but we also believe there’s no substitute for the magic of having a team together in the same room to collaborate at key times,” says Hand. “Developers seem to share that sentiment, which is why we’re working to provide relevant amenities like wider and broader open space in our projects to promote health and wellness.”

“Rather than open-plan floors, the future office will be ‘open section,’ providing multilevel settings for collaboration,” Hand continues. “Open tenant spaces with natural light, enhanced air filtration and generous common areas situated within walkable amenities will oftentimes be the most desirable office spaces to lease.”

Larry Sloan is executive vice president of investments and development at Midway, a Houston-based developer of mixed-use projects. The firm is active in various markets across Texas, but Sloan believes that the best case study for the appeal of office buildings in mixed-use settings can be found in his own backyard. He notes that the roughly 625,000-square-foot multi-tenant office component at CityCentre, Midway’s 2 million-square-foot mixed-use destination, is currently 96 percent occupied and has experienced positive leasing absorption over the past year.

“In the midst of the current pandemic, the overall Houston office market is not a great place to be right now, and at CityCentre, we’re a stone’s throw away from the Energy Corridor, a submarket that’s really struggling in terms of occupancy,” he says. “At the same time we continue to experience a flight to quality in office, and we’re also seeing office building in mixed-use settings not only outperform their peers, but also serve as a real downside hedge in softer economic environments.”

CityCentre’s mixed-use offerings factored heavily into Marathon Oil’s decision to relocate its corporate headquarters to a new 500,000-square-foot build-to-suit building at CityCentre, a deal that was underway well before the pandemic. Sloan credits the development’s food and beverage, fitness and entertainment options as key drivers in that deal. He notes that the energy giant could have opted to include those amenities on a smaller scale within their building, but it simply wouldn’t have provided employees with the same experience.

“Some users see their offices as the cultural hubs of their businesses, even if they now have more flexible work arrangements and lower densities at a given time,” Sloan says. “But in the current environment, office users have to give employees a reason to want to come to work, and being able to work in a dynamic live-work-play environment does that.”

Midway is currently preleasing CityCentre Six, a 330,000-square-foot, 14-story multi-tenant office tower that will be developed next to Marathon’s corporate headquarters. Construction is expected to start in 2022.

User demand for office buildings within walkable, vibrant neighborhoods — and a willingness to pay the higher rents they come with — is hardly a product of the pandemic. In a state like Texas that has and continues to see remarkable job growth, being in a dynamic environment with food, drink and entertainment options has become critical to attracting and retaining
talent.

Product Type Preferences

While the public health crisis has, on some level, created a push to de-densify urban settings, some developers believe that this trend will be short-lived, particularly as it pertains to office properties.

“Office is far from dead. That said, our focus right now is on new construction of smaller buildings and the acquisition of older buildings that are well-located and superbly maintained,” says Joseph Pitchford, managing director of Fort Worth-based Crescent Real Estate LLC. “We’re very bullish on boutique office buildings and the environments they create because we don’t see the current changes in office usage as permanent.”

Crescent Real Estate recently revealed plans for a new $250 million mixed-use development in Fort Worth’s Cultural District. In addition to residential, retail and hospitality components, the project includes a 150,000-square-foot office building. Pitchford says that since the project was announced, his team has been fielding a number of calls from office users that want to lease space in this vibrant neighborhood.

“It’s the right type of office product in the right environment to be delivering at this time, as users are demonstrating a preference for new construction,” he says. “Tenants recognize that at 150,000 square feet, leasing opportunities are limited, so that part of the project should do very well.”

Crescent Chairman John Goff plans to move the firm’s office into the new building, along with his other companies, Canyon Ranch, Goff Capital and Contango Oil & Gas. Construction of the entire mixed-use project is scheduled to begin this summer and to be fully complete in 2023.

We’re going to supercharge that environment by bringing a high-quality mixed-use development to it,” says Pitchford. “Everything that’s there today will be improved by the addition of this new first-class development. The existing residential, office and retail will be enhanced by having that critical mass of mixed uses that are truly synergistic.

Boutique Examples

Of course, office projects of this size are subject to land constraints in the sense that for some available sites, land values are contingent on developing larger buildings that can command heftier rent rolls.

But it can be easier to find workable sites for boutique projects within mixed-use settings wherein zoning for office is already in place and smaller parcels can be carved out from the larger site.

FarmWork-One-Allen

FarmWORK One, a 102,000-square-foot boutique office building by JaRyCo, is one of several smaller office projects within a mixed-use environment in Allen. Completion of the building, which is part of The Farm mixed-use development, is slated for summer 2022.

The northeastern Dallas suburb of Allen has been something of a hotspot for corporate office development and job growth over the past several years. One of the city’s newest office projects is FarmWORK One, a 102,000-square-foot building that is being constructed within The Farm at Allen, a 135-acre mixed-use destination by locally based firm JaRyCo Development.

The developer’s decision to include this building in Phase I, construction of which will begin this year, is a testament to the firm’s confidence in the leasing potential of boutique office product that is surrounded by ambulatory retail, restaurant and residential uses.

“The pandemic forced us to examine how we go about developing office buildings, what we put into the design and what needs to change,” says Bruce Heller, president of JaRyCo. “With The Farm, we sought to create a mixed-use development that was eco-friendly and sustainable and had a lot of open space — about 25 percent of our acreage is for open space and parks. That was pre-COVID, but even without the pandemic, it’s just a better way to deliver office product.”

FarmWORK One will offer a number of features that promote health and wellness to give tenants peace of mind while onsite, such as touchless entry mechanisms, high-efficiency air filtration, ionization treatment and electronically monitored outside air circulation.

Such features have become semi-standard for new office buildings in the current era. But JaRyco is also taking its health and wellness initiative a step further. The building will have an L-shaped design and floor plates that are larger than the typical 25,000-square-foot slabs used for buildings of its size. This feature will allow more separation between tenants on each floor.

In addition, the building will have a primary stairwell that ascends from the lobby to minimize elevator traffic. FarmWORK One’s other two stairwells — the ones that are required to meet fire code — will be encased in glass to make them more inviting and encourage employees to use them.

“Over the last 12 months, users initially talked about how much they could save by working from home,” says Heller. “But those same executives are now saying they have less efficiency and want to get people back to the office in a delicate way that makes people feel safe.”

“A certain segment of the office-using industry is still going to be better suited for remote-work programs,” he continues. “But the companies that want to get back to the office also want to give employees the flexibility to work from home on certain days. So even with people only coming in part time and being more spread out, users are probably going to want a similar amount of leasable space as they did before the pandemic.”

Allen is home to other boutique office projects that are newly built and have footprints that qualify them as boutique. Last fall, Kaizen Development Partners completed the 200,000-square-foot One Bethany West office building within the One Bethany at Watters Creek mixed-use development in Allen.

Within two months of delivery, the developer signed software developer Micron Technology to a 36,500-square-foot lease. At the time, Kaizen CEO Derrick Evers pointed to the site’s direct connectivity to over 50 restaurants and shops, and “unique, walkable experience for tenants,” as key drivers behind the deal.

In March, the Dallas Business Journal reported that Heady Investments would be developing a four-story, 105,000-square-foot office project in Allen. The DBJ stated that the building would be developed on a speculative basis and would be located within walking distance of the Watters Creek mixed-use development and Montgomery Farms shopping center.

Heady Investments had not issued a formal announcement on the project at press time.

— This article originally appeared in the March 2021 issue of Texas Real Estate Business magazine. 

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