The Houston Office Market 2009 “A Look Back”

by CoyDavidson on December 27, 2009

As 2009 comes to a close, in what was a challenging year for everyone in the commercial real estate industry. Those of us involved  in the Houston office market; Landlords, Leasing Professionals and Investment Brokers had very little to gloat about, but looking around the country it could have been much worse. 2009 was a year of  new  perspective, a year where as a broker you were grateful to have a few deals to work on. Here is a look back at the top stories and trends that developed in the Houston office market in 2009.

A Delayed Hangover

Despite the fact the in 2008 the U.S Economy was in the middle of the worst recession since the Great Depression, the Houston office market had yet to feel the pain as 2009 began. The Houston office market recorded 2.4 million square feet of positive net absorption for 2008 and had been somewhat immune to the effects of the recession. Landlords were still enjoying historically high rent levels and while absorption was down from previous years, it was still on the positive side and there was hope we would escape the recession without too much pain.

However, that all changed in 2009 as Houston lost approximately 93,000 jobs and the office market recorded negative net absorption totaling 1,161,953 square feet. The climate of the market made a significant shift as tenants hunkered down and leasing activity slowed while at the same time approximately 4.4 million square feet of new space came on-line. Landlord’s reacted by becoming more aggressive with concession packages and began to slowly offer lower rental rates to retain and attract quality tenants.

Investment Sales Virtually Non-Existent

Despite being one of the healthier office markets in the country, the severe economic downturn and chaos in the financial and debt markets slowed investment activity in Houston office buildings to a mere trickle. In one of the largest office sales of the year, the owner of downtown’s 75-story JP Morgan Chase Tower has purchased the 450,000 square foot JP Morgan Chase Center located across the street.

However, in 2009 no trophy office assets changed hands at least in a voluntary sale or non-distressed asset situation and the bulk of investments sales were in smaller suburban office properties and transaction volume for the assets were drastically down from the previous few years.

Hess Corp. Leases Entire Discovery Tower Building

In one of downtown’s biggest corporate moves in several years, independent energy company Hess Corp. leased the entire Discovery Tower office building, a property being developed on the eastern edge of the Central Business District and was renamed Hess Tower  to serve as the company’s global exploration and production headquarters.

Construction on the 844,763-square-foot building, which will be 29 stories, is scheduled for completion in the summer of 2010. Hess will relocated in 2011 after completion of the interior finish work.

Morgan Stanley Hands Over Keys to Crescent Portfolio

Three of Houston’s most prominent office developments were part of the 54 building office portfolio Morgan Stanley relinquished to the lender (Barclays Capital) in November of 2009.  The (18) Houston properties totaling over 9.7 million square feet included Greenway Plaza, Houston Center and Post Oak Central and were part of Morgan Stanley’s $6.5 billion acquisition of Crescent Real Estate Equities in 2007.

The ironic part of the deal was that Morgan Stanley handed the keys over to Barclays Capital—and the man who sold the properties to Morgan Stanley near the top of the market. John Goff, co-founder of the firm that sold Crescent to Morgan Stanley in 2007. Mr. Goff now co-owns with the Barclays PLC unit a venture that will take control of more than 17 million square feet of office towers as well as investments in resorts and hotels.

NRG Lease at Houston Pavilions

Two months after acquiring Reliant Energy’s retail operations, NRG signed a 10-year lease for 234,000 square feet of office space in the Houston Pavilions, which was redesigned to make room for the new tenant. NRG’s real estate move was made to combine the employees of NRG and the former Reliant staff in one location. Reliant’s 403,000 square feet at 1000 Main remains on the sublease market.

Kevin Howell, president of NRG’s operations in Texas, noted the bright open spaces and high ceilings in the Pavilions were reflective of the open office environment at NRG’s corporate headquarters in Princeton, NJ. and was “more of a cultural fit for us than a traditional office environment” as a key factor in selecting the building.

Law Firms re-up CBD Leases

In two of the largest lease transactions of the year law firms; Lock, Lord, Bissell & Liddell and King & Spalding renewed leases at their current buildings in Houston’s Central Business District. Lock, Lord,  Bissell & Liddell renewed their lease for 246,381 square feet at Chase Tower and King & Spalding renewed at 1100 Louisiana leasing 105, 151 square feet.

Office Buildings go Green

With a slower leasing market, many Houston office landlords began retrofitting their buildings to obtain LEED Certification.

In August, Cameron Management announced the 12-story, 351 square foot office building at 2000 St. James Place had received the stringent  Gold LEED-EB v2.o certification, becoming the first office building in Texas to do so. LEED Certification is the environmental stamp of approval from the U.S. Green Building Council.

Subsequently, Hines Interests announced three of the major buildings they developed and currently manage “Williams Tower“, “Bank of America Center”  and 1100 Louisiana were awarded Gold certification under the LEED for Existing Buildings program.

As sustainability continues to emerge as a significant trend we are certain to see more Houston office buildings earn LEED Certification.

What’s Next?

In summary, 2010 may not be significantly better but the consensus attitude is that the worst is over seems to prevail among Houston office leasing professionals. Texan’s are an optimistic lot. There is and old “Mac Davis” country & western song called “Texas in my Rear View Mirror”. For those of us that make our living in the Houston office market we are just glad 2009 is in our rear view mirror.

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