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Texas Leasing Magnate: The Q & A with Chip Colvill

Chip Colvill

Chip Colvill

Colvill Office Properties is an owner’s representative company specializing in office building leasing in Houston and Dallas. Colvill’s high-profile Houston assignments include Hines’ 48-story spec project under construction on Main Street and Frank Liu’s redevelopment of the downtown Post Office property.

Colvill currently oversees a large portfolio of Class A office space in the nation’s fourth largest city and the company has concluded over 30 million square feet of office lease transactions. Major leases include BMC Software’s 621,000-square-foot lease at CityWestPlace and Vinson & Elkins’ 450,000 square feet at 1001 Fannin. Chip Colvill, President and CEO of Colvill Office Properties, has been in the Houston office space market for more than 30 years and has seen at least five “up and down” cycles in the commercial real estate business. In this in-depth interview with Realty News Report, Colvill explains the ongoing transition into the next cycle for Houston’s office market.

Realty News Report: You’ve leased office space in Houston for decades.  What is the current state of the Houston office market?

Colvill: The current uncertainty in the world oil markets has certainly impacted the commercial real estate market in terms of energy tenant activity, but I am not sure we can call this a “cycle” yet because this time around the oil price issue is only affecting a portion of Houston’s economy, and thus only a portion of the commercial real estate market.  The 2008 and 2009 down cycle we experienced was more “national” in scope and affected all tenants in the market, financial, energy, and service-related companies.  We entered this period of oil uncertainly in a very strong state — many of the Class A office buildings throughout Houston are extremely well leased. There is not expected to be any impact there.  We are tracking many large tenants that have leases expiring in the years ahead. If these tenants are not in the market now, they will be soon and I expect future pent up demand to be fairly robust.

Realty News Report: There are a lot of office buildings under construction in Houston. What will happen when all of this space hits the market?

Colvill: At this time we are actually tracking approximately 7.5 million square feet of space that is under construction.  The good news is that nearly 50% of this space is already pre-leased.  Our firm handles the leasing of approximately 25% of this space under construction and this space delivers quarterly through the first quarter of 2017. Therefore, this space will not deliver to the market at the same time, which we trust will allow the market to absorb the new space over the next 18 months.

Realty News Report: A lot of sublease space has hit the Houston market this year. Has that been flushed from the system or do you see more sublease space coming online?

Colvill: Our firm only tracks full floor and larger sublease space in Class A and B office buildings.  With this, over 5 million square feet of sublease space has been added to the market.  It is interesting to note that nearly 60% of this space is available for only five years or less, and most full floor and larger tenants desire longer leases of 7 to 10 years. Also, a great deal of this is excess space some energy companies have vacated, so it is less efficient and older space — not built out up to today’s standards for most users.  The dynamic of sublease space being a less desirable option for larger tenants remains unchanged, so I don’t see all of this sublease space having a major impact on the market.  That said, there are a few large sublease blocks on the market that are available for long term, so we may see some of this large sublease space competitive with direct space.

Realty News Report: Does the sublease situation have other side effects?

Colvill: A silver lining is the Houston market had well in excess of five million square feet of new developments that were planning to break ground this year (we were handling the leasing and marketing of several of these projects) and most of those developers opted to hold off.  We see this is a good outcome as the new supply that is still coming is not excessive.  There were a few developers like NewQuest and Thor Equities that have recently moved forward on new development projects, which shows investor and lender confidence in Houston despite the impact of oil on demand.

Realty News Report: The Energy Corridor seems to be the place that’s hardest hit. What’s has happened there?  And what do you see happening in the Energy Corridor over the three or four years?

Colvill: The Energy Corridor has always been Houston’s best submarket with the highest occupancies and highest rates.  I have no doubt it will recover, it is just a matter of when and that is largely dependent on the oil markets.  There are four buildings under construction in the Energy Corridor totaling over 2 million square feet. I do see tenants in the area already wanting to migrate to these newer buildings in continuing the “flight to quality” that we have experienced.  With this, many owners of existing buildings will be forced to renovate their buildings and add amenities to remain competitive.

Realty News Report: What about downtown Houston? Is it getting better?

Colvill: Actually the downtown market is probably one of the best submarkets in the city right now in terms of market strength.  Unlike west Houston, the CBD has not yet seen any major sublease space hit the market and most of the top tier buildings are over 93% leased with very strong tenant bases.  There is availability in some of the lower tier Class A buildings but some of this space has been known for a while, so it has not impacted the current market either way. Our firm handles the leasing of 33% of the Class A office buildings in the CBD and we are seeing strong leasing activity, particularly at 609 Main, 811 Louisiana, 1415 Louisiana, and 708/712 Main, that have availability.

Realty News Report: Your firm is handling leasing for Hines’ 1 million square foot spec building under construction downtown — 609 Main at Texas. How’s it going? Will you make some big news soon?

Colvill: We are getting close to announcing our first tenant and have strong interest from several mid-size and large tenants.  The building delivers at the end of 2016 and will be unsurpassed in terms of quality and amenities.  It is one of two multi-tenant buildings in the U.S. that is being developed with raised flooring for under floor air distribution, so we are seeing a lot of prospective tenant excitement about that.  Many of the largest corporations that have built headquarters buildings recently like Shell, Devon, and Exxon have structures with raised flooring. This is the wave of the future.  Hines is an awesome client for developing what will be the highest quality office building in downtown Houston; this has been a very fun project.  The building also will have a state-of-the-art fitness center and conference center in prime space on the second floor. We are also seeing extremely positive response to the amenity offerings.

Realty News Report: Is there an increase in concessions? What’s the typical amount of free rent being offered?

Colvill: This is a submarket-by-submarket, building-by-building issue in that it is a “tale of two cities.”  There are many buildings that are fully leased now and in great shape.  But where an owner has a large vacancy they need to fill, we are seeing higher concessions.  Rent abatement is being offered at these buildings to help the new tenant reduce the “effective” rate, particularly at some of the new developments. We are also seeing higher tenant improvement allowances across the board due to escalating construction costs.

Realty News Report: Do you think the market has bottomed out and is rebounding or do we still have a ways to slide downward?

Colvill: What we are telling our clients is we are still in a “wait and see” market.  We are waiting to see what impact the oil price instability will ultimately have on the tenant market and how long this could last.  We have not seen rental rates decline like oil prices have and we probably won’t, since many buildings are leased up and have very strong sponsorship and capital stacks.  With that said, we do see a slight softening in net rents through the end of 2015 — perhaps somewhere along the lines of 4-6%, which is minimal.

Realty News Report: Can you give us a Houston office market outlook? What do you think may happen over the next 3 to 5 years?

Colvill: I am certainly not an oil expert, but based upon all of the oil forecast reports, expected supply decline, etc., most reports and friends I have in the energy business expect uncertainty in the oil markets to continue into 2016.  However, there are many aspects of Houston’s economy that are doing well, including petrochemical, medical, and so forth, so I expect Houston to push through with ease as it has in past cycles.  Houston has always been a resilient city and it will prove this up once again.  I heard a very brilliant investment individual recently say that we are in the middle of a “super cycle” so this oil downturn could move past us sooner than expected. I thought that was a very interesting way to look at it, so I have adopted that theory as well since there are still many parts of Houston’s economy that are very positive.

Realty News Report: What’s next for Colvill Office Properties? Any expansion plans?

Colvill: We are very fortunate to currently represent 21 million square feet in Houston and Dallas. Our plans are to continue to grow our Dallas office and possibly move into other markets like Austin and possibly outside of Texas.  Our goal is to become a regional company since many of our clients and prospective clients own or want to invest in real estate throughout the Texas region.

Realty News Report: Any other comments?

Colvill: We were recently hired by Lovett Commercial to begin leasing and marketing the former Post Office site on Franklin Street in downtown.  Most people in Houston know this location if they went there at midnight to pay their taxes.  It is a very exciting project. Frank Liu and his team are extremely creative and, as a result the project will have “creative” office space with over 20 foot ceiling heights, awesome retail space, a multi-family component and other great amenities. The location of the development — on Buffalo Bayou and adjacent to the Washington Avenue Corridor — will be very exciting and a game-changer for downtown Houston, which continues to become more of a “live, work and play” environment.  We look forward to unveiling Lovett’s plans in the months ahead.

Realty News Report is a Texas-based publication led by journalist Ralph Bivins.

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