Skyscraper Construction Plans Emerge in Houston

HOUSTON – (By Ralph Bivins, Realty News Report) – New office towers are on the drawing boards again in Houston.

There could be as many as a dozen new office projects underway within a few short years, according to Houston’s top leasing experts.

Companies are eager to lease space in new buildings with restaurants and amenities that make desirable workplaces. But excellent new buildings that fit the bill are difficult to find in Houston these days and very few are under construction.

A Dozen Projects on the Drawing Board

“I’d say six to 12 new buildings are going to happen,” says Houston commercial real estate veteran Tim Relyea, executive vice chairman of Cushman & Wakefield. Since getting into the real estate business in 1978, Relyea has leased more than 60 million SF with a combined rental value of $47 billion.

For the right developer in the right location, Relyea says, the demand and rationale for breaking ground on new office properties in Houston is probably stronger than “anytime in the last 20 years.”

The construction boom won’t happen overnight. A flock of construction cranes won’t hover over the Houston skyline by Thanksgiving Day.

But developers are expected to be announcing some new Houston office projects in the coming months.

The surge in demand for new space is soaring as many of Houston’s older skyscrapers and suburban office buildings are hurting.

According to the latest quarterly report from CBRE, the vacancy in “Trophy Class A+” buildings is 11.7%. Meanwhile vacancy in less desirable Class B office properties is 24.9%.

“This divergence is particularly evident across Houston’s leading submarkets, such as the CBD (downtown), Katy Freeway, and The Woodlands, where tenant preference for quality remains most pronounced,” the CBRE report said.

Major Tenants Will Be Making Leasing Decisions Soon

Parker Duffie, managing director overseeing leasing in CBRE’s Houston and Louisiana offices, said decision time is approaching for a number of major firms that will be wanting to relocate their offices in the next few years. Duffie said the “Who’s Who” of major companies will be looking for new offices in Houston in short order because their existing leases are about to expire in the next three or four years. Large anchor tenants need to make plans well in advance.

The big tenants, including law firms, banks, and energy companies, want the best new buildings for recruiting and retaining talented employees. Multiple restaurants, fitness centers, outdoor places, bicycle facilities, and easier commutes to work all make buildings more attractive.

Currently, Houston has a new 127,000-SF building underway in Autry Park near Shepherd Drive and Buffalo Bayou, but it’s 95% pre-leased. And Southern Land is developing about 100,000 SF of office on Kirby Drive, just south of Westheimer. In addition, there are a few buildings underway that are already leased or custom-built for single companies, including the new Service Corporation Inc. (SCI) headquarters on Allen Parkway.

“Houston has been slow to add new buildings,” Duffie said.

For the overall office market, he citywide office vacancy in Houston is an ugly 25%. Cushman & Wakefield reports 4.2 million SF of sublease space also languishes on the market.

Pre-Leasing Required – No Specs Allowed

Today, lenders take a cautious approach, requiring 50% of an office project to be preleased before giving the go-ahead to the developer.

The delivery of more office space in Houston won’t happen overnight. Pre-leasing half the building will take time. Design and construction are not quick snaps.

In suburban markets, smaller new buildings around 300,000 SF could be constructed. Sites along the Katy Freeway, near CityCentre of Memorial City, have recorded strong leasing and may be ripe for new buildings.

The JLL real estate firm describes Houston’s current construction pace as “muted.” In its second quarter report, JLL said a top-quality office s[ace, which it calls “Tier 1” office product, is in the offing.

“Tier 1 availability is becoming increasingly scarce, driving new high watermark rents, and bringing spec construction back on the table for some developers,” JLL reported. “Due to this strong performance, Houston will likely see at least one more office building kick off in the coming quarters.”

Gradual improvement in the office market can also be found in many cities around the nation.

Cushman & Wakefield recently reported office vacancy improved in more than half of the 92 American markets in its report. Old office buildings are being torn down and some are being converted to residential or hotel uses. The emergence of Artificial Intelligence has also increase demand for office space in a number of cites, Cushman & Wakefield reported.

Investors React to Today’s Opportunities

Newer top-tier office buildings attract the attention of investors.

Hines Global Income Trust just acquired the 405 Colorado office building in downtown Austin for $151 million. The 206,000-SF tower is 100% leased.

“We believe the U.S. office recovery is underway, with demand concentrated in fully leased trophy assets.” Alfonso Munk, Global Co-Head of Investment Management at Hines.

Downtown Houston’s 47-story, 1 million-SF Texas Tower was completed by Hines in December 2021. Today, it is 99% leased.

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