Supply Imbalances and Costs Explain Office Sales

HOUSTON—Metropolitan Houston counties leads the nation in net population gains, according to the most recent US Census American Home Survey 2016. And, the financial and technology sectors are two of the main economic drivers. This has made the commercial real estate market an attractive target for investors, according to Commercial Café/Yardi-Matrix.

This provides an explanation for the astronomical office acquisitions/dispositions. Even at a state-level five-year low in number of deals, first-quarter office sales exceeded the billion-dollar mark with $1.19 billion invested, even with the exclusion of the undisclosed sales. The average price per square foot reached a five-year peak at $294, the highest number on record since 2013, according to Yardi-Matrix.

“Supply imbalances and costs explain much of what is occurring in the Houston commercial office market. The logic to lay all of the blame on energy is overblown and misleading,” Doug Ressler, director of business intelligence, Yardi-Matrix, tells GlobeSt.com. “Compounding the vacancy problem is an interest to build, live and work closer to the CBD. Houston is one of the most expensive cities in the world to build commercial and residential projects, and is compounded by a skills shortage according to a new Turner & Townsend report. The Houston area still continues to present one of the lowest risk profiles, and even though the cost may be higher, the Houston market has been a proven path.”

In total, 21 buildings changed hands in eight major transactions last quarter, with five of them closing at undisclosed prices. Two portfolio deals with 14 buildings traded for a total of $748 million, says Yardi-Matrix.

Space City was the setting for the largest office sale of the quarter: Parkway Properties sold a 49% interest in its Greenway Portfolio in the Greenway submarket. The portfolio consists of Phoenix Tower at 3200 Southwest Fwy., 3800 Buffalo Speedway and nine buildings in the Greenway Plaza office campus. A joint venture between the Canada Pension Plan Investment Board, Silverpeak Real Estate Partners and affiliates of TH Real Estate paid $512 million to acquire a stake in the 11-building roughly 5-million-square-foot office portfolio. Approximately $315.8 million of expected net proceeds went to Parkway, with TH Real Estate and Silverpeak together retaining a 24.5% interest, and CPPIB retaining another 24.5% interest in the portfolio. Parkway will retain a 51% interest in the assets and provide property management and leasing services for the joint venture.

A dozen construction projects were completed in the first quarter as well, including the 350,000-square-foot Amegy Bank Tower in Houston's Galleria area. Amegy Bank NA's 24-story headquarters at 1717 W. Loop South broke ground in November 2014 and counts Charter Title Co. as a tenant.

“Houston's rent growth depends to a large extent the newer buildings especial B+ class and their locations which account for a larger share of available office space,” Ressler tells GlobeSt.com. “An example of a prime location would be Buffalo Bayou Park, an urban area with live-work-play options.”

A total of 31 office construction projects are scheduled for a second quarter completion, most of which are in the DFW area (6.3 million square feet), followed by Houston (1.7 million square feet), Austin (974,000 square feet) and San Antonio (640,752 square feet).

“Houston commercial office real estate construction will and is beginning its ascendancy,” Ressler tells GlobeSt.com. “Houston is a rich diverse economic engine consisting of MOB (plus healthcare), airports, education, hotels and industrial opportunities. We estimate that Houston will require 18 to 24 months to regain the economic level it enjoyed prior to the energy downturn.”

HOUSTON—Metropolitan Houston counties leads the nation in net population gains, according to the most recent US Census American Home Survey 2016. And, the financial and technology sectors are two of the main economic drivers. This has made the commercial real estate market an attractive target for investors, according to Commercial Café/Yardi-Matrix.

This provides an explanation for the astronomical office acquisitions/dispositions. Even at a state-level five-year low in number of deals, first-quarter office sales exceeded the billion-dollar mark with $1.19 billion invested, even with the exclusion of the undisclosed sales. The average price per square foot reached a five-year peak at $294, the highest number on record since 2013, according to Yardi-Matrix.

“Supply imbalances and costs explain much of what is occurring in the Houston commercial office market. The logic to lay all of the blame on energy is overblown and misleading,” Doug Ressler, director of business intelligence, Yardi-Matrix, tells GlobeSt.com. “Compounding the vacancy problem is an interest to build, live and work closer to the CBD. Houston is one of the most expensive cities in the world to build commercial and residential projects, and is compounded by a skills shortage according to a new Turner & Townsend report. The Houston area still continues to present one of the lowest risk profiles, and even though the cost may be higher, the Houston market has been a proven path.”

In total, 21 buildings changed hands in eight major transactions last quarter, with five of them closing at undisclosed prices. Two portfolio deals with 14 buildings traded for a total of $748 million, says Yardi-Matrix.

Space City was the setting for the largest office sale of the quarter: Parkway Properties sold a 49% interest in its Greenway Portfolio in the Greenway submarket. The portfolio consists of Phoenix Tower at 3200 Southwest Fwy., 3800 Buffalo Speedway and nine buildings in the Greenway Plaza office campus. A joint venture between the Canada Pension Plan Investment Board, Silverpeak Real Estate Partners and affiliates of TH Real Estate paid $512 million to acquire a stake in the 11-building roughly 5-million-square-foot office portfolio. Approximately $315.8 million of expected net proceeds went to Parkway, with TH Real Estate and Silverpeak together retaining a 24.5% interest, and CPPIB retaining another 24.5% interest in the portfolio. Parkway will retain a 51% interest in the assets and provide property management and leasing services for the joint venture.

A dozen construction projects were completed in the first quarter as well, including the 350,000-square-foot Amegy Bank Tower in Houston's Galleria area. Amegy Bank NA's 24-story headquarters at 1717 W. Loop South broke ground in November 2014 and counts Charter Title Co. as a tenant.

“Houston's rent growth depends to a large extent the newer buildings especial B+ class and their locations which account for a larger share of available office space,” Ressler tells GlobeSt.com. “An example of a prime location would be Buffalo Bayou Park, an urban area with live-work-play options.”

A total of 31 office construction projects are scheduled for a second quarter completion, most of which are in the DFW area (6.3 million square feet), followed by Houston (1.7 million square feet), Austin (974,000 square feet) and San Antonio (640,752 square feet).

“Houston commercial office real estate construction will and is beginning its ascendancy,” Ressler tells GlobeSt.com. “Houston is a rich diverse economic engine consisting of MOB (plus healthcare), airports, education, hotels and industrial opportunities. We estimate that Houston will require 18 to 24 months to regain the economic level it enjoyed prior to the energy downturn.”