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The Energy Corridor: The Epicenter of Houston’s Sublease Office Space Problem

“Energy brought us out of the 2009 market and it will bring us out of this one,” said Kevin Wyatt SVP with Lincoln Property Co.

“Energy brought us out of the 2009 market and it will bring us out of this one,” said Kevin Wyatt of Lincoln Property Co.

HOUSTON— The Energy Corridor, named for its large concentration of energy tenants, has a difficult year ahead with 2.9 million SF of sublease space.

The availability of sublease space has soared in Houston in the last year or so and 78 percent of the big sublease blocks have come from energy firms, according to Transwestern’s Sublease Statboard. Transwestern reports the Energy Corridor has more sublease space than downtown or any other Houston office submarket.

In Houston’s Energy Corridor, the new Three Westlake Park building has 390,000 SF of sublease space and Two Westlake Park has 267,000 SF of sublease.  Energy giants ConocoPhillips and BP are the tenants in those buildings.

Coming out of the recession, energy tenants were defensively leasing space leading to shadow vacancies and now a chunk of the city’s sizable sublease availability which now exceeds 8.5 million SF across the city of Houston..

But the sublease supply, while daunting, offers opportunity for tenants and affects landlords and owners differently depending on term length and the quality of the space, said veteran developer Pat Hicks of Hicks Ventures at the Bisnow Future of the Energy Corridor event Wednesday.  “Two to forty-four months is purgatory,” said Hicks, citing the complicated nature of making sublease terms appealing.

The Energy Corridor, which has a total of 36 million SF of office space, is seeing some creative leasing strategies like synthetic leases.

Despite an imbalance of supply with today’s sluggish, if any, demand in west Houston the submarket is beginning to attract a variety of tenants outside of the energy industry. The location and quality of office product have drawn companies looking at attract and retain talent out west. So while the near future may not hold feverish leasing activity as the major tenants are focused on cost containment and reduction, the longer term outlook is positive for the submarket. Especially for owners who are well leveraged and – on the whole – showing very little distress in the Class A assets.

Houston remains the Energy Capital of the World. And the true believers at the Bisnow Energy Corridor Conference don’t discount the perpetual promise of oil as they consider the future of the Energy Corridor.

“Energy brought us out of the 2009 market and it will bring us out of this one,” said Kevin Wyatt SVP with Lincoln Property Co. “No one moves faster than an oil company in an upturn or downturn.”

March 31, 2016

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