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New Amenity-Loaded Office Towers Move Houston Market to “Reclassification” of Office Properties

Hines builds innovative tower of former Houston Chronicle site: Rendering of new tower shows Hines’ existing 717 Texas Avenue building (left), new Hines building (center) and Hines’ Chase Tower on right.

HOUSTON –  (Realty News Report) – Downtown’s Houston office market is about to be redefined by a commercial real estate brokerage because new office towers have raised the bar for prime office properties.

CBRE, the largest commercial real estate brokerage in Houston, is going to tackle a “reclassification” of office properties in downtown in 2019, says Cody Armbrister, CBRE’s senior managing director in Houston.

The corporate executives who make multi-million real estate decisions will have an answer to the big question that is coming into focus: “Exactly what is a Class A office building in today’s market?”

The reclassification of buildings – the best buildings will be Class A, some will be Class B and a few Class C. Some buildings will slip from Class A to Class B.

“We feel like it’s time,” says CBRE tenant representation broker Jon Lee, executive vice president.

The reclassification issue comes to a head because new office buildings are rising on the skyline. The new buildings have characteristics such as floor-to-ceiling windows, higher ceilings, restaurants, balconies or outdoor gardens and amenities that appeal to Millennials. The Millennials demand collaborative work space. Cubicles are losing popularity. Buildings with fitness centers and bicycle racks are in demand. Food courts are out; upscale “food halls” with quality restaurants are the new trend. Better restrooms, better air conditioning and high-end sustainability features – all are “musts” in new buildings.

Office buildings are not just viewed as a “commodity” of square footage anymore. Great new buildings can attract and retain top employees, Lee says. Buildings are a personnel issue.

The icing on the cake? With employees sharing collaborative work space, companies can get by just fine with smaller office spaces. So major tenants can move into a new building with a modern configuration and lease less space than they occupied in their old-paradigm building. For example, Vinson & Elkins leased 212,000 SF in the new Hines building under construction in downtown, a 37 percent decrease from the 338,920 SF the law firm now occupies in First City Tower, according to Avison Young.

“The rental rates are not as important as the retention of employees,” says Chris Lewis, managing principal of Lee & Associates in Houston.

People in the real estate industry are calling it: “flight to quality.” The unspoken flip side of that trend is the “flight from mediocrity’ or even the “flight from inferiority.”

Landlords and investors who control aging office buildings are searching for answers. “What do you do with the old product?” Lewis asks.

Older office buildings need to be upgraded to stay competitive. Brookfield Properties just launched a massive renovation of the 4.2 million SF Houston Center complex. This follows Brookfield’s recent redo of Allen Center. Buildings that aren’t renovated face the possibility if slipping into Class B status, or even Class C.

But the inventory of downtown buildings needing upgrades is huge. Some 10 million SF is vacant in downtown Houston. Another 2 million SF of space is under construction in new towers by Hines and Skanska and those new downtown buildings will put even more pressure on the owners of older office buildings.

So the Houston office market moves ahead, adding more and more desirable new buildings, while the older stock of buildings becomes a growing question mark.

“One thing is for certain,” writes Lee & Associates Travis Taylor in a recent analysis, “the younger generation is changing the way people work.”

Jan. 29, 2019 Realty News Report Copyright 2019

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