Houston On Track for Record-Setting Office Sale

"919 Milam and Bank of America buildings will definitely exceed that," says Rusty Tamlyn, senior managing director with Holliday Fenoglio Fowler LP in Houston. In recent months, marketing has gotten under way for handful of CBD buildings, including the 542,000-sf high rise at 919 Milam St., 1.3-million-sf Bank of America building at 700 Louisiana St. and 372,000-sf building at 1001 McKinney St.

Darrell Betts, senior vice president with Grubb & Ellis Co.'s Houston office, also predicts Downtown office sales will hit record levels in 2007, putting it down to increasing rental rates. According to Grubb & Ellis' latest statistics, the CBD's available space is 5.9 million sf in the 35.5-million-sf inventory or translating to 83.3% occupancy. Still, Betts points out, Downtown rents grew at an unprecedented rate of 13% during 2006.

"With the record level absorption we've seen throughout the area, including the CBD, Houston's become a desirable place for investment," Betts adds. "The smart owners are the ones who saw this coming 12 and 18 months ago and bought then."

Tamlyn agrees, adding Boston-based Property & Portfolio Research's blessings on Houston also have fueled investment demand. "A lot of the pension fund and institutional money follows it. And, it has Houston ranked as the number three office market in the country in 2007 in terms of total return," he says. Job growth, huge absorption and little or no new construction are adding to Downtown's attraction as an investment location as well, Tamlyn says.

Although the metro is experiencing a construction boom, much of the activity is taking place in the far north submarket and west in the Energy Corridor along the Katy Freeway. The CBD is seeing some development as well, but much of what has been launched won't come on line for another 18 months to two years.

In addition, replacement costs are driving investors to buy existing product rather than develop. Tamlyn says building a standard office tower from scratch, complete with a separate parking garage would run about $325 per sf, which makes already existing buildings trading at well under $300 per sf almost a steal.

It's not only the city's core class A office buildings that have piqued interest. "Eighty-five percent of the money out there today is looking for value-add types of returns," Tamlyn says. "Core returns are so incredibly low, around the 4% level, that most of the money is looking for higher returns either through rolling rents or lease up."