Another Major Houston Company Stirs up the Houston Office Market
Downtown Mega-Tenant KBR has officially scrapped its plan for a massive office campus in West Houston and announced today it has permanently abandoned the project and will extend and expand its lease in Houston’s Central Business District. The giant engineering & construction concern is the third major Houston office tenant to send tremors through the Houston commercial real estate community in recent weeks. See my post from last week Energy Mega-Tenants Stir Up the Houston Office Market.
Klaudia Brace, KBR Senior Vice President, Administration in a prepared press release stated: “After reviewing both market conditions and KBR’s overarching business plan, it became clear that expanding our downtown presence was not only a good business decision, but also brings the added benefit of contributing to our City’s continued downtown revitalization,” Brace in the statement went on to say: “KBR’s 100 year history is built on roots that originated in downtown Houston and with this expansion we can build on that history while offering continued quality service to our Houston-based customers”. While we are expanding our downtown footprint, our work and relationships in the broader Houston community will continue.”
KBR, which occupies approximately 600,000 square feet in KBR Tower at 601 Jefferson and about 300,000 square feet in 500 Jefferson will have just over 1.2 million square feet at completion according to the press release.
Just over a year ago the engineering and construction giant put the 910,000 square foot campus project at the southwest corner of Interstate 10 and the Grand Parkway on hold due to market and economic conditions. This is a big win for Houston’s CBD office market which has held up remarkably well during the recent recession. At the end of 2009 Colliers International reported a vacancy rate of 12.8% in Houston’s CBD and the submarket recorded positive net absorption of 222,332 square feet during the 4th quarter of 2009. Colliers International 4Q 2009 Houston Office Market Report.
My suspicion is the “good business decision” referenced in the press release were the lease terms they were able to achieve by staying put at their current location. While current economic conditions make new development very difficult, the shift in market dynamics over the last 12-18 months certainly improved the renewal terms they were able to achieve. At the end of the day, they were likely offered a deal to remain downtown that was too good to leave on the table.
The KBR transaction is a prime example of a savvy tenant taking advantage of the window of opportunity that exists in current economic conditions. The Houston office market survived the “Great Recession” in much better shape than most office market around the country. As the recovery begins to take hold this window still exists, but the market fundamentals in Houston could close that opportunity far sooner than other markets around the country. Given this opportunity, now is the time for Houston office tenants to seize lower cost options and minimize your occupancy costs for the next several years.