Houston CBD Proves Surprise in Growth Year

"I don't think anyone at the beginning of this year could have told you that Downtown would be as healthy as it is right now from an occupancy standpoint," says Preston Young, co-managing partner in Houston for Stream Realty Partners LP.

Young and Henry Hagendorf, a senior investment adviser for Sperry Van Ness in Houston, point out that leases involving large chunks of space in Downtown buildings, such as the 465,000-sf Chevron USA lease at Continental Center, combined with rising oil prices, have helped to put CBD office buildings in the category of "desirable places to do business."

Hagendorf adds that what is happening now can be traced back to the push to put the CBD on the map. "I think this all started when the big push to develop Downtown a number of years ago happened, including addition of the Toyota Center, Minute Maid Park and residential units being delivered to the market," he says. "City leaders at the time had the foresight to reinvigorate Downtown, and it's continued to go forward."

Young points out "several companies have clearly decided to put their flags in Downtown and have a vested interest in wanting to see it succeed." Furthermore, 2007 will see more interest in the area, partly because so little new product is expected to come on line.

This is not to say that other submarkets are falling by the wayside. Hagendorf says infill areas, like the Galleria, Greenwood Plaza and Westchase, continue strong. And, he adds, the Energy Corridor has been very active.

Though construction is strong in these markets, there isn't much fear about overbuilding. "Land isn't being sold at a fire sale as it has been in the past so overbuilding isn't a concern," Young says. Furthermore, the Woodlands keeps a tight rein when it comes to development. "The leaders up there don't allow it to become overbuilt and won't allow building unless there are clear signs of demand," he says.

Hagendorf and Young see more of the same in 2007, with upward pressure expected to continue on rents. "If interest rates stay low, I think overall vacancies in Houston will continue to decline, certainly in 2007," Hagendorf says. "Even with new construction coming on line, the final overall vacancies will drop a percentage point or two."

The only thing that could impact Houston's growth is the national economy. "When you look at things like inverted yield curves and other factors, it sends a signal there could be a couple of bumps in the road going forward, especially for service-oriented companies and other businesses," Young says. "But healthcare, petrochemical, oil and gas, they'll continue to head upward."