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HOUSTON-Armed with economic incentive from the energy industry, office developers are pushing a pipeline to add 8.8 million sf of class A and class AA office space in Greater Houston. The fast-paced spec construction is offset by the fact that only four class A office buildings have been built in the past 25 years in the CBD.

“The last time we saw this kind of construction was back in 1998 and ’99,” Ariel Guerrero, vice president for Grubb & Ellis Co. in Houston, tells GlobeSt.com. “And the new ones are truly class A and truly trophy properties.” Year to date, 1.9 million sf has delivered, with 2.3 million sf to come on line before the year ends. The pipeline’s balance will hit between 2009 and 2011. In 1999, developers brought out 4.9 million sf, according to Guerrero’s records.

CB Richard Ellis’ research team, also unleashing second-quarter stats, reports 44 office buildings are under construction. Of the nine million sf that it tracked, five million sf will deliver this year. “It only represents a 2.7% increase to the total market size and seems to be in line with anticipated demand in the energy industry,” the CBRE team concludes.

Guerrero says the metro’s vacancy rate in 1999 is similar to today’s level, which is 87.52% in all classes and 90.35% in class A at the second quarter’s close. And now as before, the construction leader is the Katy Freeway/Energy Corridor, which accounts for three million of the 2008-09 pipeline. In 1999, the submarket generated 2.1 million sf of the 4.5 million sf of deliveries. “We’re kind of seeing the same thing,” he says. “It seems history does repeat itself.”

Guerrero says the new research shows Katy Freeway/Energy Corridor, the Downtown and Northwest Freeway submarkets represent 6.4 million sf of the pipeline. He estimates 90% of the new buildings are class A and class AA. “There are quite a few notable projects under way,” he says.

CBRE’s report breaks down the Katy Freeway/Energy Corridor. Its team has found there are 2.6 million sf under construction in the Energy Corridor and 1.38 million sf in the next-door neighbor’s territory. Another one million sf is coming up in the FM 1960/Texas 249 corridor.

Like construction dockets everywhere, some projects could be stalled due to the lending environment or a developer’s hesitancy to start, but certainly not due to the dynamics of Houston. The city is outperforming the nation in job count, population growth and fundamental economic indicators.

“Many have broken ground, but there are a lot of planned and proposed projects,” Guerrero points out. “The likelihood is many of those may not start construction.” Among the question marks is Crescent Real Estate Equities, now owned by New York City-based Morgan Stanley, which has had a CBD high rise on its drawing board for a couple years. The brokerage circle also is waiting to hear when Los Angeles-based Thomas Properties Group Inc. is going to start the 1.8-million-sf expansion at BMC Software Inc.’s 1.4-million-sf campus along Beltway 8.

Guerrero says Houston isn’t overbuilt despite the size of the pipeline and deliveries to date. “Thirty percent of the new construction is preleased,” he says, “and many won’t deliver until 2009 so we still have time for preleasing.” Vacancy could “creep up” a bit as a result, he adds, “but there doesn’t appear to be any red flags.”

With Houston racing ahead of the nation, investors near and far are using the city as a launch pad for profit, some quicker to sell than others. “Houston is on the map from an investment standpoint,” says Keith Lloyd, Grubb & Ellis’ senior vice president. “There have been phenomenal returns on investments. People who have come in and come out in 12 to 18 months have done very well.”

The CBRE team supports Lloyd’s observation, adding “insatiable investor appetite has fueled new record-breaking pricing.” The groundswell has resulted in a run up in valuations have “allowed investors to capitalize on short-term holds,” the team says. “Institutional investors and offshore investors that have avoided Houston for the last 10 to 20 years are now actively pursuing Houston office properties for their portfolios.”

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