The 2020 Outlook for Houston’s Office Market: Q&A with Chip Colvill of Colvill Office Properties
HOUSTON – (Realty News Report) – Houston is awash in office space. Over 50 million square feet of space is vacant. The overall vacancy rate in the Houston office market is over 21 percent, most researchers say, and the Energy Corridor vacancy rate is over 30 percent. Downtown has its share of vacancy, too. What are building owners doing to keep their properties relevant and attractive? And what does the future hold as 2020 begins? Realty News Report sat down with real estate industry veteran Chip Colvill, president and CEO of Colvill Office Properties, to find out. Chip is responsible for directing leasing and marketing of a 17.8-million square foot portfolio of Class A office properties in Houston. He has completed over 20 million square feet of lease transactions during his career in directing the leasing and marketing of some of Houston’s most iconic office developments including 609 Main, 600 Travis, 1100 Louisiana, 910 Louisiana, 811 Louisiana, 1001 Fannin, CityCentre, 5 Post Oak, and the Galleria Office Towers.
Realty News Report: The term “flight to quality” has been around for years to refer to tenant demand and preference for top quality office space. But with the competition for talent amid Houston’s large supply of aging office space, it seems like the “flight to quality” is a factor in the Houston office market like never before. What’s your assessment?
Chip Colvill: Although we have over a 20% vacancy in the class A office market you would think we would have a similarly high employment rate but Houston’s unemployment rate is around 4% so the labor market is tight. With this, we continue to see firms that value their employees as assets looking to relocate to new developments to ensure employee satisfaction, allowing these companies to attract and retain top employment talent. The new developments offer a higher quality environment, greater amenities, more efficient floor plans, better elevatoring, superior parking, etc. causing these new developments to be in high demand.
Realty News Report: Houston’s new buildings, 609 Main at Texas, the Bank of America Tower, and the Hines’ Texas Tower which is under construction, have done remarkably well in attracting tenants. Can you explain this attraction to the new properties?
Chip Colvill: The new modern design, floor to ceiling glass, more efficient floor plan designed to accommodate the latest tenant layouts, and UFAD (underfloor air distribution in the case of 609 Main and Texas Tower) are just a few of the reasons. In capitalizing on strong tenant demand, our firm has leased up 609 Main and we understand Bank of America Tower is close to finishing up too, so Texas Tower is really the only remaining new development space in the CBD coming on line in late 2021. Hines has focused on the tenant experience more than ever at Texas Tower, including an unsurpassed lobby design with rich amenity offerings at the street level. Hines has learned best practices along the way in developing 811 Main and 609 Main, so Texas Tower will be an amazing building. Accordingly our Texas Tower leasing team is seeing strong leasing activity at this property.
Realty News Report: And the new buildings are getting significant rental rates?
Chip Colvill: The new developments continue to get the highest rents in Houston’s history but keep in mind our rates are still low compared to other major cities throughout the United States. Many national and international companies understand this and recognize the value of the new developments to their business model. The cost to build new developments continues to escalate so we will continue to see rising rents in this regard. This bodes well for existing buildings to push rents as our supply/demand continues to move to stabilization.
Realty News Report: Houston has a huge stock of office buildings constructed in the 1980s. So there’s been a billion-dollar tsunami of renovations/redevelopments going on in downtown alone. Can you elaborate?
Chip Colvill: Indeed, there has been millions of dollars spent on 1980 vintage buildings in order to remain relevant and competitive. Many of these assets are iconic buildings that have withstood the test of time so the renovations will ensure they remain solid contenders. However, if you look at the large inventory of vacant space in the market, most of this is in lower tier class A buildings that will still have a tougher time attracting new tenants despite extensive renovations. Some owners have thrown good money after bad in this regard as some of this space is obsolete, at least for now in a market with abundant vacant space.
Realty News Report: This may be a trade secret, but what are the most important things building owners need to do to keep their projects competitive in the flight-to-quality era?
Chip Colvill: By focusing on the tenant experience. Amenities are critical so conference centers, food service, fitness centers, etc. are very important to prospective tenants so they can “check the box” when touring these assets. Also, it is important to position the vacant space so prospective tenants can visualize themselves in the space as much of the space in these buildings is second/third generation type, older space. This includes “white-boxing” space, presenting hypothetical new tenant layouts, 3-D visualization of office space, promotional marketing videos, etc. For our firm, this has meant we have had to work harder than ever to market these types of buildings to keep them out in front of prospective tenants. The challenge has been fun and we continue to look for new ways to market these assets to differentiate our efforts and attract new tenants.
Realty News Report: Some of these office tower redevelopment budgets are phenomenal. Reportedly some $40 million was spent on the 580,000 square foot 811 Louisiana redevelopment. Hines, which completed the building (formerly Two Shell Plaza) probably spent less than $40 million to construct the original building in the early 1970s. Does it surprise you that building owners are renovating to this extent?
Chip Colvill: I can’t verify this $40 million number but I can say 811 Louisiana is a great building in an excellent location in the heart of the CBD. It has an efficient floor plate, excellent parking, tunnel retail, etc. so from an ownership perspective the risk of these renovations were mitigated due to the solid position 811 Louisiana has in the market. On top of these renovations ownership has constructed some spec suites in the building that are seeing excellent demand. Our 811 Louisiana leasing team always see consistent new tenant activity, so ownership clearly made a sound investment in renovating this building, which remains today as one of Mr. Gerald Hines’ proudest achievements as being part of the One and Two Shell Plaza original office development.
Realty News Report: Louisiana Street was such an incredible hotbed for skyscraper construction in the 1980s. Why did Louisiana Street originally become such an important office address?
Chip Colvill: I would have to say access was the immediate driver since Louisiana feeds out to I-45 to the north and Highway 59 to the south. Plus it is further west in the CBD so prominence was assured on the skyline. To this day, the buildings along Louisiana continue to see high demand but other areas like the northern district (near Market Square) and the Discovery Green area are seeing great demand as well as tenant preferences have migrated to those areas as well. Street level amenities are more important now to today’s office tenants.
Realty News Report: Midway is planning the CityCentre 6 office building on the west side. With the office market still in recovery, is it going to be difficult to lease it? Or is it just another chapter in the flight-to-quality trend?
Chip Colvill: We are seeing strong lead prospective tenant activity at CityCentre 6. CityCentre remains a top project in the entire city of Houston due to the highly amenitized, mixed-use environment and excellent access at I-10 and Beltway 8. CityCentre 6 will be developed despite tough market conditions as tenants continue to look for this type of office product and heavy amenity environment.
Realty News Report: Also, there’s the Marathon Oil build-to-suit underway next to CityCentre on the Katy Freeway. Otherwise, do you expect to see other new office projects started in 2020?
Chip Colvill: Yes, I do anticipate more new development activity will occur in areas like the Galleria, along Allen Parkway, in Midtown, and along I-10. Tenants are looking all over the city now at various emerging areas to be near where their employees want to be. You might even see another new building get kicked off downtown at some point in the future as there continues to be strong tenant interest in moving downtown with all of the multi-family apartment development, restaurant and hotel activity making downtown highly desirable.
Realty News Report: The inventory of sublease space is being burned off and leasing activity seems to be improving. What do you see for the Houston office market in the year ahead?
Chip Colvill: Historically in the office market it has not been uncommon to see available sublease space being 2-3% of the overall market. We had a record amount of sublease space hit the market beginning in 2015 but we are happy to report it is burning off and is now only 4 percent of the Class A market. With this, sublease space is no longer such a drag on the market.
Realty News Report: Any other comments?
Chip Colvill: We are optimistic that 2020 will be a strong demand year as we have seen many large deals hitting the market in the fourth quarter of this year. We are also seeing some blue chip technology companies looking for blocks of space in the market so that is positive for Houston to see these new tenants coming to Houston. Other bright spots include LNG (Liquified Natural Gas) companies, many of which are in their infancy with significant expected growth. We are tracking about 300,000 square feet of LNG tenants in the CBD that are expected to secure space in the market in 2020.
Correction: The Texas Tower, which is under construction in downtown Houston, will be completed in late 2021. An earlier version of this article incorrectly stated another delivery date. Realty News Report regrets the error.