Will More Major Corporate Office Space Users Opt for Ownership?

by CoyDavidson on June 23, 2011

Chevron Set to Close on Four Allen Center

Four Allen Center

The Houston Chronicle  reported yesterday that Chevron Corp will close on its purchase of Four Allen Center (1400 Smith) a building they already lease from Brookfield Office Properties. Chevron is speculated to be buying the 1.3 million square foot tower, formerly the Enron building for what could be a record price for Houston.

The Chronicle report alluded to the fact that the coming lease accounting changes could have played a role in Chevron’s decision to purchase the building.

The Impact of Lease Accounting

There has been considerable discussion regarding the new Lease Accounting changes and whether it will make leasing less desirable for some corporate space users, as all leases will be going onto the balance sheet and recorded as an expense up-front rather than annually and as a result removing one of the benefits of leasing. This could be a significant decision driver for companies who are concerned with the magnitude of assets on their balance sheet and have access to lower borrowing costs.

In the case of Chevron in Houston, I would speculate an operational philosophy and the Net Present Value (NPV) of cash were likely more relevant drivers in the lease-vs-own decision, particularly since Chevron owns the adjacent 1.1 million square foot tower they acquired in 2004. Furthermore even at the speculated purchase price of $340 million it is not as significant as you might think for a Energy Major like Chevron when you take a look at their financial statements. The cost of purchasing of 1400 Smith doesn’t compare to the investment cost of deploying one new offshore oil rig in the Gulf of Mexico. I suspect the upcoming lease accounting changes were a contributing factor but not the primary one.

More to Come?

In 2004, Boeing purchased a 400,000 square foot building in the Clear Lake area they leased from Brookfield coincidently and last year Anadarko acquired their previously leased campus in the Woodlands. Furthermore in light of Exxon-Mobil’s recent announcement to build a new corporate campus near the Woodlands it appears many large corporate users are giving more consideration to ownership versus leasing. These high profile real estate decisions by some of  the city’s largest office users are not the first in Houston but a sign of likely more to come.

  • Coy…

    Thanks for the reportage.  Yes, I suspect this will be a trend for a number for reasons: successfyl corporations being flush with cash and having access to low-cost debt, still low (though, climbing) values for office properties, and the forthcoming changes to lease accounting.

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