HOUSTON – As unpredictable energy prices continue impacting the global economic market, one thing remains fairly constant: Houston’s commercial real estate market has too much space chasing too few companies. It’s been that way for more than a year; analysts and others are divided on when the situation will improve. But what about the landlords? What’s their perspective? To find out, Realty News Report talked with Executive Vice President Michael Anderson of Houston’s Colvill Office Properties who’s firm is responsible for leasing and marketing a 17.5 million square foot portfolio of Class A office properties on behalf of numerous institutional owners. Michael has spent his entire 15-year career representing institutional owners of first class office buildings. He was honored by the Houston Office Leasing Brokers Association (HOLBA) as the Top Landlord Leasing Representative Of The Year for 2014. Lately, Anderson has been tackling a significant challenge – leasing Hines’ 48-story tower which is under construction in downtown Houston. With the headwinds of declining Class A office market, Anderson has taken the Hines building to 50 percent pre-leased by inking a huge lease with United Airlines and signing several law firms.
Realty News Report: What is the state of the Houston office market today?
Michael Anderson: At the end of Q2, we had just under 8 percent of the Class A inventory on the sublease market. A healthy historical average for available sublease space in Houston is 2-3 percent. As a result, there is downward pressure on direct rents as many landlords are forced to compete with sublease space. We have seen increased activity over the past couple of months as many tenants are starting to recognize that it is a good time to make a deal.
Realty News Report: What will it take to make things better in Houston? What will bring on the turnaround?
Michael Anderson: We need to absorb a lot of available office space before the market will rebound. Houston is a very resilient city, however, and will push through this cycle. Innovation will drive Houston forward.
Realty News Report: How are landlords coping with the situation?
Michael Anderson: Like everyone else, they are adjusting. A majority of Houston’s Class A inventory is institutionally owned so we are fortunate in that regard. We are continuing to see landlord’s pump money into their buildings to remain competitive – new lobbies, fitness centers, conference centers, etc.
Realty News Report: Houston’s had almost 100 energy companies taking Chapter 11 in this downturn. What happens to a landlord when a tenant takes Chapter 11?
Michael Anderson: Typically, it means that they’re going to have some additional space for lease that they weren’t expecting. The tenant has until the earlier of 120 days (may be extended an additional 90 days) following the petition date or the date a plan is confirmed to either accept or reject its lease. My experience has been that tenants typically reject their lease then negotiate an agreement to move to another building or negotiate with their existing landlord albeit for less space.
Realty News Report: The Energy Corridor is mentioned as a submarket with acute difficulties. Any idea when will that area turn around?
Michael Anderson: West Houston, and the Energy Corridor in particular, have been hit hard by the recent downturn. It is impossible to say when it will turn around, but there are several major corporations in the Energy Corridor that have historically taken down space in huge chunks. So, it wouldn’t surprise me if the Energy Corridor fills up in a hurry when the market improves.
Realty News Report: What about Greenspoint? Is the market there getting better or worse?
Michael Anderson: It’s hard to imagine that it could get much worse. Greenspoint has a long road ahead, but there are certain locational benefits to the area, and it offers a large block of space for a company looking for a campus environment. Until recently, Greenspoint had very little availability so it will come back, but it will take a while.
Realty News Report: Because of the current situation, do you foresee decreases in rent over the next year?
Michael Anderson: Generally speaking, yes. There are certain exceptions, but for the most part Landlords are getting more aggressive to chase the deals that are in the market. There is a supply/demand imbalance at the moment that is putting downward pressure on rents.
Realty News Report: What concessions are being offered to tenants now?
Michael Anderson: The types of concessions haven’t changed much – free rent and tenant improvements – there’s just more of it now.
Realty News Report: There’s over 10 million square feet of sublease space being offered and more coming to the market. Are tenants interested in sublease space? What will it take to lease some of this space?
Michael Anderson: In past cycles, sublease spaces with limited term or dated finishes weren’t all that attractive. The current cycle is different. Many of the subleases have at least five years of term remaining in desirable buildings.
Realty News Report: Colvill represents the new 1 million square foot Hines tower under construction at 609 Main at Texas, which should be completed around the first of the year. Has this been a big challenge?
Michael Anderson: 609 Main at Texas is the culmination of Hines’ more than half century of development expertise and will set a new standard for the office experience in Houston. We continue to see a lot of interest in the project as discerning tenants understand the value proposition, and the benefits it provides to their most important asset – the employees. Plus, it’s right in the middle of the downtown’s path of growth along vibrant Main Street.
August 7, 2016. Copyright Realty News Report 2016
Realty News Report is a Texas-based publication edited by Ralph Bivins.