HOUSTON – (Realty News Report) – On Wednesday, July 17, 2018, Hines and partner Ivanhoé Cambridge, announced construction of a new, 47-story, 1 million-SF office tower on the former site of the Houston Chronicle building downtown. While law firm Vinson & Elkins, signed a lease for 212,000 square feet and Hines will take 155,000 square feet, the new construction occurs as Houston’s CBD reports a 20 percent vacancy rate. In recent years, Hines also developed 811 Main (formerly BG Group Place) and 609 Main at Texas – two major downtown towers. Why build a new building when there is so much vacant office space downtown? To find out the answer, Realty News Report talked to Tim Relyea, Executive Vice Chairman of Cushman & Wakefield of Texas, Inc. Relyea is one of the nation’s top real estate professionals; he has completed more than 60 million square feet of transactions totaling more than $47 billion. And he led the Cushman & Wakefield team representing Vinson & Elkins in leasing space to anchor the new Hines tower, one of the nation’s most significant office transactions in 2018.
Realty News Report: Last week, Hines announced a new 1 million office building on the former downtown site of the Houston Chronicle. What does this mean for the CBD? Will more older buildings become vacant as the moves trickle down?
Tim Relyea: I am very familiar with the new Hines building. This will not only be a great building for the City of Houston, but also the State of Texas. It will be the first building with three life safety stairwells and will be cutting edge with the very best technology when it opens. This building will not affect the so-called “older” buildings since the tenants that it will attract will more than likely come from the current Class “A” inventory. Many of the Class “A” buildings in Houston won’t be able to compete with this new building so it may pull a few tenants from the existing Class “A” inventory, but it will likely attract new tenants to Houston which is even better for the city. I am incredibly excited that Cushman & Wakefield has been involved in the development of this newest and latest “iconic” building for Houston. Both Vinson & Elkins and Hines will relocate their headquarters to this building, which is an immediate stamp of approval. Ivanhoe Cambridge will be the lead capital source which is also exciting since we have dealt with their firm in Canada and they have invested in some of the highest profile projects in America. Ivanhoe Cambridge is truly a first-class organization with many knowledgeable real estate professionals. Pelli Clarke Pelli and Kendall Heaton provided some of the best possible design and construction drawings and they will make every detail of this building stand out beyond typical design. We had a large team come together at Cushman & Wakefield, namely Scott Wegmann, Kevin Snodgrass, Jim Bailey and Brooke Wommack on the brokerage side, who worked every angle. John Connett and William Flores, from our construction management team, worked tirelessly and Terence Cooper provided exceptional financial modeling. A project of this magnitude requires a team of seasoned professionals to pull together all the pieces in an efficient and time critical manner. This transaction is certainly a career highlight for many people here at Cushman & Wakefield. We are incredibly proud of the end result.
Realty News Report: What’s the current office space situation downtown? More space chasing fewer tenants?
Tim Relyea: “More space chasing fewer tenants” is what one would surely read in today’s various publications. However, statistics can be misread and certainly misleading. Even though the Class “A” and general downtown vacancy is high in certain areas, there are many sections of downtown Houston that that are extremely tight. In the last 40 years representing tenants in Houston, I have seen downtown divide by a “hidden” line not only east and west, but now also north and south. The success of 811 Main (formerly known as BG Group Place) and 609 Main at Texas has proven that new changes in architecture such as higher slab-to-slab heights, different core-to-window depths and 10’ floor-to-ceiling glass windows without 30” sills affords users much more natural light and attracts higher-end office users.
Realty News Report: How do you see the situation downtown changing in the near future? More space filling up or additional office space being vacated?
Tim Relyea: Having represented many companies relocating into or expanding within downtown, I still see this trend continuing even though downtown has been affected by the relocation of Exxon Mobil to their campus in north Houston and the relocation of Shell Oil’s operational group (but not trading operation) to their west Houston campus. I represented British Gas, Continental Airlines, Citigroup’s energy finance group, Dynegy and RBC Capital, when they relocated from suburban Houston to downtown Houston and this trend will not change. The amenity base, sporting venues and a huge increase in residential development has made downtown Houston more and more attractive. The demolition of the Pierce Elevated will combine downtown with Midtown, the final expansion of the Hardy Toll Road from the North Loop into downtown and other planned improvements will continue to fuel the growth and vitality of downtown Houston.
Realty News Report: From a real estate perspective, how has downtown Houston changed over the past two decades?
Tim Relyea: Nine new high-rise office buildings, containing 6 million SF have been completed since 2008 and construction is under way on Skanska’s 750,000 square foot building and construction recently commenced for a new 1 million-SF building the former Houston Chronicle site. These new buildings will continue to add to the city’s tax base. The biggest change has been the massive construction boom of residential buildings and hotel rooms. Even though residential buildings can be located off the primary grid, i.e. the downtown tunnel system, new office buildings require tunnel access. There are fewer and fewer great office building sites in downtown and the cost to acquire these sites easily doubled during the last two decades. Fortunately, Houston has become a much higher focus for the legal industry with over 20 new national and global law firms have entering the Houston market and creating a more diverse downtown tenant mix.
Realty News Report: How do you think the CBD will transform over the next 10 years or so? Will downtown become stronger? Less important as companies move to the suburbs? Is downtown facing problems?
Tim Relyea: Unlike some cities that have had a substantial legal industry flight to the suburbs (i.e., Downtown Atlanta to Midtown and Downtown Dallas to Uptown) there has not been one major law firm in Houston relocate from downtown to the suburbs. The legal market in Houston will continue to be a strong base that will not erode in the next 10 years. I do not see major problems for downtown as a whole even though certain buildings that do not regularly modernize through renovation, introduction of interior amenities and maintain a competitive edge will fall behind.
Realty News Report: Some people say that Pennzoil Place, which was completed in 1975, was downtown’s most important tower because it broke the architectural mold and made design a selling point for landlord leasing agents. What are your thoughts? Is that era now ending?
Tim Relyea: I agree that Pennzoil Place had a profound impact on Houston’s skyline and major high-rise office buildings with its “iconic top”. It was one of the first buildings that designed core-through restrooms, floor-to-ceiling glass and even a 2.5-foot window mullion system, versus the typical 5-foot, to provide a more efficient office layout. Pennzoil Place was and still is an iconic building; the era has not ended. Bracewell was one of the first tenants to relocate to Pennzoil Place and it remains home for Bracewell’s headquarters office today.
Realty News Report: We are seeing new downtown buildings going up – the Skanska building (under construction); the recently completed 609 Main @ Texas; and the Hines tower on the Chronicle site. These structures seem to have a great appeal to new tenants. Why?
Tim Relyea: All of these buildings provide what many companies are looking for in today’s work environment: a lot of natural light, energy efficiency and amenities. Both 609 Main and the new building on the former Chronicle site have 10’ floor-to-ceiling windows and under-floor HVAC systems and many other base building design features such as core through restrooms, oversized freight elevators, wider fire stairwells, and in the case of the Chronicle site, three fire stairwells to accommodate the new code requirements. These new buildings also have stellar amenities such as conference centers, fitness centers and new dining options.
Realty News Report: The older downtown office stock such as Houston Center, the Bank of America/Republic Bank building are 1980s vintage. What will happen to that space? Does it sink to Class B? Will landlords renovate?
Tim Relyea: Houston Center and Bank of America (soon to be renamed when the bank relocates to Skanska’s new building) will not sink to Class “B” space. Brookfield’s acquisition of Houston Center will infuse massive capital into the project and bring the development to an updated visual condition. 1 and 2 Houston Center were originally developed by Texas Eastern, a corporation that did not spare any expense at the time of development, and still has the right efficiencies, floor-to-ceiling glass, and a fantastic amenity base. Bank of America Center is a national iconic building, designed by Philip Johnson and it will remain Class A status for many years. The owner also has design plans to update the street level entry to bring in much more natural light and create an open environment for the former Republic Bank retail banking hall. Houston Center and Bank of America will stay high on our list for all prospective clients.
Realty News Report: Shell and Exxon have left downtown for the suburbs. How will this change the CBD dynamics? Is downtown losing its popularity?
Tim Relyea: Exxon Mobil’s vacancy was not a huge hit to the downtown market for various base building reasons, as well as the location of the vacated building. When the time is right, Shorenstein Properties of San Francisco, which bought the building from Exxon, will repurpose the structure for its best use even if it is not office space. Shell Oil did not relocate because they were unhappy with downtown. The move was a real estate decision based on having excess space in their “owned” facility/campus in west Houston compared to their leased premises in downtown. The oil and gas downturn in 2014 caught Shell Oil, like many other energy companies, with substantially more real estate than needed and they made a business decision based on their operations and not solely locational preferences. Fortunately, the majority of the vacated Shell Oil space has been subleased, so the relocation was not as painful to the market as originally anticipated.
Realty News Report: The new hotels, the new multifamily towers downtown — do they make any difference to the office market?
Tim Relyea: All of the new hotels and multi-family buildings have created a significant boom not only for the office buildings, but all of the new retailers and other amenities that create an ongoing circular benefit for each other. As these other real estate sectors expand, more firms will want to place their operations within close proximity.
Realty News Report: Any other comments?
Tim Relyea: Downtown Houston continues to be one of the best central business districts in America. Houston is one of the few major cities that is experiencing reverse relocations, i.e. suburban to downtown moves. With infrastructure changes and future mobility improvements granting better access to downtown such as the demolition of the Pierce Elevated, downtown Houston will continue to see solid growth in the future.
July 23, 2018 Realty News Report Copyright 2018