HOUSTON – (Realty News Report) – Too much office space is chasing too few tenants in downtown Houston, where the vacancy rate hovers around 20 percent. So, what is on the agenda for Houston developers such as Hines? A new 1 million SF building on the former site of the Houston Chronicle. To sort out the seemingly disconnect – a 20 percent vacancy rate and a new office tower starting soon – Realty News Report turned to Michael Anderson, Executive Vice President of Colvill Office Properties. Anderson is responsible for overseeing the firm’s leasing team in addition to leasing and marketing a 7.8 million SF portfolio of Class A office properties in Houston. Anderson, who has spent his entire 15-year career representing institutional owners of first-class office buildings, has completed over 8 million square feet of lease transactions during his career. Notably, Anderson recently represented Hines in leasing the new project being built on the Chronicle site, which is anchored by a 212,000-SF lease by the Vinson & Elkins law firm.
Realty News Report: We know downtown vacancies have gone up and the supply of sublease space is significant. How would you describe the state of affairs in downtown’s office market?
Michael Anderson: We are at an interesting point in the history of the downtown office market. The majority of the buildings were developed almost 40 years ago, and some of them aren’t equipped to adequately handle the demands of today’s office tenant. Many have either recently undergone renovation, or are in the process of doing so, but there are limiting factors in some cases that cannot be solved by cosmetic upgrades to building lobbies. The aging stock coupled with changing space standards is requiring tenants to evaluate their office needs and the buildings in which they conduct business. As a result, there is a lot of tenant movement in downtown currently, particularly in the legal and financial sectors. The demand from the energy sector has been slow for the past few years, but I think we will see an uptick soon.
Realty News Report: Colvill Office Properties was the exclusive leasing agent for the 48-story, 1 million SF 609 Main @ Texas. which opened in 2017 — the newest skyscraper on the Houston skyline. What percent of the building is leased?
Michael Anderson: 67%
Realty News Report: The lease-up at 609 Main @ Texas has been relatively brisk, considering the softness in the overall office market. Why are companies choosing new space instead of older, but more affordable Class A space?
Michael Anderson: Tenants are in a competitive marketplace for talent, so they are looking to new buildings to help them create an attractive environment for their current and future employees. Newer buildings like 609 Main at Texas are designed to handle higher space densities allowing tenants to reduce their footprint. The price per square foot is much higher than many existing buildings, but the more relevant metric for a tenant is price per employee.
Realty News Report: Are there any concessions being given nowadays such as free rent?
Michael Anderson: Concessions have been a part of our market since I arrived in Houston in 2001. They fluctuate obviously, and over the past several years we’ve seen concessions increase, but they’ve stabilized over the past 12 months.
Realty News Report: What’s your outlook for the downtown market?
Michael Anderson: I’m very bullish on downtown. I think we will see more corporations relocate to downtown to take advantage of the infrastructure, mass transit options, and amenities. The downtown living initiative spurred a lot of residential activity, and I think we’ll see that trend continue downtown. An increased population will drive activity on the restaurant/bar side and make for a more dynamic downtown experience. I’m also excited about the highway realignment project and continued focus on improving our transit options. The recent innovation corridor announcement should also be great for our city!
Realty News Report: Are we looking until 2020 or beyond for the vacancy rates to drop significantly?
Michael Anderson: I think so. It is important to note that there are some buildings in our market that are fighting against functional obsolescence, therefore the vacancy rates in those buildings will be much higher than the rest of the market. High quality buildings are in demand, and will continue to outpace the older, lower quality buildings.
Realty News Report: Why are companies like Shell and ExxonMobil leaving the CBD? Isn’t downtown as attractive as it once was?’
Michael Anderson: In the case of Shell, they had a pre-existing campus in the Energy Corridor, and ExxonMobil obviously built their new campus near The Woodlands. They both wanted to get everyone together in one location and thought that was the most effective way to do so. Downtown buildings create more of a vertically integrated campus setting that is very attractive, and why Aramco, EDF Trading, RBC Capital Markets and others recently chose to move downtown. Chevron is a good example as well. They have a huge footprint downtown in multiple buildings.
Realty News Report: Most people say Hines has been the most significant player in downtown Houston. What has Hines contributed to the CBD market?
Michael Anderson: Hines has left an indelible mark on the Houston skyline. Their passion for quality is unmatched, and they continue to be a leader in high-performance building design. Hines’ recent announcement that they will move their global headquarters to downtown is exciting news and fitting for them to be in a location where they have had such a huge impact on the built environment.
Realty News Report: What’s going on with One Shell Plaza, the first major tower developed by Gerald D. Hines Interests?
Michael Anderson: Shell left an 800,000-SF hole in the 50-story building. NRG subleased a big block of space there, so they are the new anchor. One Shell is well-positioned and is a great option for many tenants.
Realty News Report: Two Shell Plaza was redeveloped and rebranded as 811 Louisiana. Has that been a successful transformation?
Michael Anderson: The owner did a fantastic job on the renovation, and as a result we were able to pull Targa Resources out of a neighboring building.
Realty News Report: Any other thoughts about the future of downtown Houston?
Michael Anderson: Downtown has come a long way since I moved to Houston in 2001. It is important that our core is strong, and I applaud city leaders for their commitment and investment to downtown. One of our biggest challenges going forward will be improving our mass transit options and developing meaningful solutions to move millions of people around our city.