Houston’s office market has seen better times. Affected by the downturn in the energy market, more office space is chasing fewer tenants. Several weeks ago, one of the global energy giants, Shell Oil, announced plans to leave downtown for its suburban facilities — Shell’s Woodcreek Campus and the Shell Technology Center. Shell had been an anchor in downtown Houston for 45 years. To find out more about the situation, Realty News Report turned to Paula L. Bruns, Vice President of Leasing at Colvill Office Properties, which handles leasing of the buildings that had been occupied by Shell. Paula is responsible for leasing and marketing a 5 million square foot portfolio of Class A office properties in Houston on behalf of numerous institutional owners. She was recognized in 2013 as a “Heavy Hitter” by the Houston Business Journal. Paula formerly served as Director of Leasing in the Hines Southwest Regional Office.
Realty News Report: The average Houstonian may have been surprised to learn that Shell Oil plans to move out of downtown Houston in the first quarter of 2017. What happens next with Shell Plaza, which is first major skyscraper created by master developer Gerald D. Hines?
Paula L. Bruns: Shell leaving the CBD is certainly the end of an era, especially now since there has been so much new office, retail, hotel and multi-family development in the CBD, which has created an exciting place to live, work and play. One Shell Plaza is an iconic building that has been maintained and updated through the years, including a recent $40 million improvement project to the plaza, common areas and infrastructure of the building. Shell has several years left on their lease in the building and we are working with their leasing representatives (Tim Relyea and Joe Peddie of Cushman & Wakefield) to help to locate replacement subtenants. The building itself will be a great relocation opportunity for a large tenant. The Shell space has been recently renovated and is ready for occupancy in excellent “plug and play” condition.
Realty News Report: What’s going on with Two Shell Plaza, now known as 811 Louisiana?
Paula L. Bruns: During 2007-2013, over $20 million was spent on infrastructure improvements, including new chillers, boilers, roof, energy management system, elevator modernization, Americans With Disabilities Act (ADA) restroom modifications, and new floor-to-ceiling dual-pane glass windows on the office floors. After Shell vacated the building in January 2015, a repositioning of the asset was implemented with a new address, new lobby, new facade, new common area finishes and a tenant conference facility. These improvements represented an additional $21+ million, so the building is in first-class condition ready for future tenants. As a result, we are experiencing significant leasing activity. Renovations to the tunnel area are currently in design phase and we look forward to announcing additional improvements soon.
Realty News Report: The availability of sublease space is certainly a big story with some research reporting that it totals 12 million SF citywide, all classes. Are there other significant blocks of sublease space coming, or has the supply reached the top?
Paula L. Bruns: There has certainly been a lot of media coverage on this topic, but it is important to point out that a significant amount of sublease space that has been added to the market is short-term space and may not be a factor in impacting our market. Many tenants simply won’t have interest in this space due to the short remaining sublease term. However, many of the subleasing offerings include significant lease term remaining like the Shell Oil sublease space in One Shell Plaza, the type of space is space that tenants will consider when looking at direct lease space. We do believe the supply of sublease space has reached the pinnacle so hopefully it will be less of a factor to our market moving forward, but we have a way to go before the dust finally settles.
Realty News Report: What do you predict for the sublease space? Will lease prices decline? More free rent?
Paula L. Bruns: Sublease space, as I mentioned, has impacted the market. But more importantly, the impact of the oil and gas market has affected energy tenants in our market, and with limited leasing activity in this sector, we have seen downward pressure on rental rates, with abated rent and higher tenant improvement allowances as concessions being offered by many landlords that have vacancy. As oil prices have seemed to stabilize, we are starting to see energy tenants become active in the market again, but it will be a while before we get back to normal market conditions.
Realty News Report: Where do we go from here? What are you expecting for Houston’s office market in 2017?
Paula L. Bruns: Since the office market lags behind the oil market, the office market is expected to begin recovery in 2017 as the energy market starts to recover. 2017 will continue to be a challenging year for the office market but many tenants that are currently sitting on the sidelines may start hitting the market, so this pent-up demand may have a positive effect. We are optimistic for next year.
Realty News Report: Several major office buildings are under construction. How will these new properties impact the office market?
Paula L. Bruns: In the CBD, only one major office building was constructed for multi-tenant occupancy, 609 Main, and the lease-up of that building has been extraordinary. Colvill Office Properties handles the leasing of 609 Main on behalf of Hines. Hines recently announced the building is approximately 50 percent leased with tenant build-outs starting end of this year. With that said, the CBD is certainly not overbuilt with new office development like other submarkets have experienced.
Realty News Report: What the status of the Energy Corridor? What will happen there in 2017 and 2018?
Paula L. Bruns: The Energy Corridor has experienced the perfect storm unfortunately with several new buildings being built and delivered to that market while at the same time large users like BP and ConocoPhillips are shedding excess space, with substantial sublease offerings. With over 75 percent of the tenant base in the Energy Corridor being energy-related tenants, that submarket is experiencing the toughest market conditions. With that said, the Energy Corridor has historically been one of Houston’s top submarkets and we expect it will recover in the future. We are starting to see many “non-energy” tenants looking for space in this submarket due to the very high quality of available space and buildings.
Oct. 8, 2016 Realty News Report Copyright 2016