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Update: Houston’s Commercial Real Estate Market, According to NAI Partners

NAI Partners executives discuss the Houston real estate market. Photo credit: Michelle Leigh Smith for Realty News Report.

HOUSTON – (By Michelle Leigh Smith for Realty News Report) – The Houston office market seems flatter than a West Texas mesa.

Houston’s total office vacancy in the third quarter stands at 20.1 percent, up a smidge from 20.0 percent in the second quarter, according to NAI Partners.

Job growth in the local economy has been good, but it’s not been enough to make a significant difference in filling the city’s oversupply of vacant office space, says NAI Partners, at its third quarter press breakfast this week.

What has been changing is the office towers and the characteristics that tenant companies want.

“When you look at the new buildings being delivered, they have more amenities than the older traditional office buildings,” says NAI Partners Griff Bandy, who represents many tenants from small to midsize local and regionally owned companies.

There is a war for talent happening across the nation. And companies with an outstanding building and a high-quality workplace have an advantage.

“Companies with growth plans are taking a serious look at buildings with more amenities for their recruiting/employee retention efforts.  In this interest for newer, higher amenity buildings, these same companies are willing to consider more efficient spaces and embracing smaller employee per square foot ratios in their future offices,” Bandy said. “Amenities many are interested in include:  multiple food & drink options close by, easy access to open collaborative spaces both in their space and in building, work out/locker/shower options close by, and in many cases ability to live/work/play close by the office.”

NAI Partners, the fifth largest commercial real estate brokerage in town, moved its own offices recently. NAI Partners moved from an older building with a deli in the basement at 1900 West Loop South to a new building at 1360 Post Oak in Four Oaks Place, a sleek, modern delight with five restaurants on site (within walking distance).

“As partners in our firm, we elected to move our offices to a space that better met those wishes,” says Bandy. “Our headcount per square foot is more efficient today than it was two years ago but we traded that for better overall amenities for our employees.”

An example of the more efficient, more open/collaborative work environment, with attractive amenities to workers of all ages is what The Cannon is doing at 1334 Brittmoore Drive.

Along the Energy Corridor, office vacancy is at 30 percent, so one in three square feet is available, says Bandy.

David Bateman, Senior Vice President of Office Project Leasing, says, “Houston is still very entrepreneurial.  There are an amazing number of new concepts coming out of the ground.  Everyone loves oil and gas, we live by it, we die by it, but what we’re hearing and seeing are more entrepreneurial ventures in other areas, including technology,” he says. “The average transaction size has decreased as tenants try to increase their experience and decrease the square footage so they can trade up on amenities.”

RETAIL

Jason Gaines, Senior Vice President of Retail Services, described the retail scene as low and slow. “I have a sense that existing retailers are struggling on a national scale,” Gaines says. “Stores like Bed, Bath & Beyond are getting their feet chopped off by Amazon. There are strengths in Katy, League City where the demographics are high. Rent fatigue is setting in other areas. I see tenants looking for relief.  Some landlords are open to the cash-flow management issues and are working with them.  I also think that some of the national guys are not doing enough to make you excited – for example, we don’t know what JCPenney sells. I put it on them. They are sitting on their hands. I don’t see them creating a lot of sense of urgency.”

In the wake of the uncertainties on the national front, Gaines has seen examples of what he calls “The Four Horsemen of the Apocalypse” moving in – furniture, fitness, experience-oriented destinations like Candytopia and deep discount boxes – when a mattress store or a Barnes & Noble moves out.

INDUSTRIAL

Travis Land, the principal who oversees the industrial side, says there are 18 million SF of Class A industrial opportunities. He’s seen a vast increase in the supply of dock high space (warehouses with loading capacity with bays that are four feet off the ground). “The vacancy rate is at 11 percent in Class A,” says Land. “Second generation manufacturing spaces have held up well.”

APPRAISAL

Gary Brown, who consults on appraisals and property taxes for NAI, says taxes are something that are in every tenant’s mind. “Whenever HCAD looks at how they value a building, if the overall occupancy costs go up 15 percent, that’s a real number and it’s all pass through for the tenant.”  He believes the higher taxes are why some tenants have chosen to move off Beltway 8 to buildings constructed in the mid-80s or 90s.

Nov. 15, 2019 Realty News Report Copyright 2019

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