Hines’ New Skyscraper and Downtown Houston’s Future — Q&A with Tim Relyea

HOUSTON – (Realty News Report) – On Wednesday, July 17, 2018, Hines and partner Ivanhoé Cambridge announced plans to build a new 47-story, one-million-square-foot office tower on the former site of the Houston Chronicle building in downtown Houston. Law firm Vinson & Elkins signed a lease for 212,000 square feet and Hines committed to 155,000 square feet. The announcement comes at a time when the Central Business District (CBD) is reporting roughly a 20 percent vacancy rate. Hines has previously developed major downtown projects such as 811 Main (formerly BG Group Place) and 609 Main at Texas. To understand why a developer would pursue a large new office tower while vacancy remains elevated, Realty News Report interviewed Tim Relyea, Executive Vice Chairman of Cushman & Wakefield of Texas, Inc. Relyea is one of the nation’s leading real estate advisors, with more than 60 million square feet of completed transactions valued at over $47 billion. He led the Cushman & Wakefield team representing Vinson & Elkins in the lease that helped anchor the Hines tower—one of the most significant office transactions in the U.S. in 2018.

Realty News Report: Last week Hines announced the new one-million-square-foot office building on the former Houston Chronicle site. What does that mean for the CBD? Will older buildings be vacated as tenants migrate to the new tower?

Tim Relyea: I know the Hines project well. It will be a major addition for the City of Houston and for the State of Texas. The building will feature three life-safety stairwells and state-of-the-art technology when it opens. I don’t expect it to hollow out older buildings; instead, it will likely draw tenants from the existing Class A inventory. Many current Class A properties will struggle to compete with a next-generation tower, so the new building may pull some tenants from those assets, but it should also attract new companies to Houston, which benefits the city overall. Cushman & Wakefield played a significant role in bringing this project to fruition, and having both Vinson & Elkins and Hines relocate their headquarters here is an immediate endorsement. Ivanhoé Cambridge as the lead capital partner is notable; they are a first-class organization with deep experience in major U.S. projects. Architects Pelli Clarke Pelli and Kendall/Heaton produced high-quality design and construction documents that will make this building stand out. Within Cushman & Wakefield, Scott Wegmann, Kevin Snodgrass, Jim Bailey and Brooke Wommack drove the brokerage work, while John Connett and William Flores led construction management and Terence Cooper developed financial models. A project of this scale requires an experienced, coordinated team. This transaction is a career highlight for many of us, and we are proud of the result.

Realty News Report: What’s the current office space situation downtown? Is it truly “more space chasing fewer tenants”?

Tim Relyea: That phrase shows up in many headlines, but statistics can be misleading. While overall Class A and downtown vacancy is high in parts of the CBD, other submarkets within downtown are very tight. Over the past 40 years representing tenants in Houston, I’ve seen downtown divide into distinct areas—east/west and increasingly north/south. The success of 811 Main and 609 Main at Texas demonstrates that contemporary design elements—higher slab-to-slab heights, shallower core-to-window depths and ten-foot floor-to-ceiling glass without large sills—offer more natural light and attract higher-end office users.

Realty News Report: How do you see the downtown office market evolving in the near term? Will space fill up or will vacancy grow?

Tim Relyea: I expect the trend of relocations into downtown to continue despite some large moves to suburban campuses, such as ExxonMobil and portions of Shell. I have represented numerous companies that moved from the suburbs to downtown—British Gas, Continental Airlines, Citigroup’s energy finance group, Dynegy and RBC Capital—and that dynamic continues. Improved amenities, sports venues, and a significant increase in residential development have made downtown more attractive. Infrastructure changes like demolition of the Pierce Elevated, completion of the Hardy Toll Road expansion and other planned improvements will further integrate downtown with surrounding neighborhoods and support continued growth and vitality.

Realty News Report: How has downtown Houston changed over the past two decades from a real estate perspective?

Tim Relyea: Since 2008, nine new high-rise office buildings adding roughly six million square feet have been completed. Construction is underway on Skanska’s 750,000-square-foot project and recently began on the new one-million-square-foot tower at the Chronicle site. These projects expand the city’s tax base. The biggest transformation has been the residential and hotel construction boom. While residential buildings don’t require tunnel access, new office buildings often do, and there are fewer high-quality development sites remaining. Land acquisition costs have roughly doubled over the last twenty years. Another notable change is the increased presence of the legal industry—more than 20 new national and international law firms have entered Houston, diversifying downtown’s tenant mix.

Realty News Report: Over the next decade, how will the CBD evolve? Will downtown strengthen or weaken as companies relocate to the suburbs?

Tim Relyea: Unlike some cities where law firms have moved to suburban submarkets, downtown Houston has retained its legal industry core. No major law firm has left downtown for the suburbs in Houston. I expect the legal market to remain a stable base over the next ten years. Downtown should remain strong overall, although buildings that don’t modernize—failing to renovate, add interior amenities or maintain competitive standards—will fall behind.

Realty News Report: Pennzoil Place, completed in 1975, is often credited with changing design expectations for downtown towers. Is that era over?

Tim Relyea: Pennzoil Place had a lasting impact on Houston’s skyline and office design with its iconic top and efficient planning—core-through restrooms, floor-to-ceiling glass and narrow mullions to optimize layouts. It remains an iconic building and its influence continues. Bracewell moved there early and still maintains its headquarters in the building.

Realty News Report: New downtown buildings—Skanska’s project, 609 Main, and the Hines tower—seem especially appealing to tenants. Why is that?

Tim Relyea: These newer buildings deliver what companies increasingly demand: abundant natural light, energy efficiency and modern amenities. Both 609 Main and the new Chronicle-site tower feature ten-foot floor-to-ceiling windows, underfloor HVAC systems and design elements like core-through restrooms, oversized freight elevators and wider stairwells. The Chronicle-site building will incorporate three fire stairwells to meet updated safety codes. Additionally, these towers offer amenities such as conference centers, fitness facilities and new dining options—features that are high priorities for today’s tenants.

Realty News Report: What will happen to older office stock like Houston Center or the Bank of America/Republic Bank building from the 1980s? Will they become Class B or will owners renovate?

Tim Relyea: I don’t expect Houston Center or the Bank of America Center to fall to Class B. Brookfield’s acquisition of Houston Center will bring substantial capital and improvements that modernize the project. Houston Center’s original development featured efficient floor plans, generous glass and strong amenities that remain attractive. Bank of America Center, an iconic Philip Johnson design, will maintain Class A status for years and its owners have plans to improve street-level entries to increase natural light and create more inviting retail and lobby spaces. Both projects will remain competitive for prospective tenants.

Realty News Report: With Shell and Exxon moving some operations to suburban campuses, how has that affected CBD dynamics? Is downtown losing popularity?

Tim Relyea: ExxonMobil’s departure had a limited impact on the downtown market given the specifics of the building and its location. Shorenstein Properties, which acquired the building, will repurpose it as appropriate. Shell’s move was primarily an operational real estate decision—owning excess space on its west Houston campus—not a reflection of dissatisfaction with downtown. The 2014 energy downturn left many energy firms with more space than needed, prompting business-driven consolidations. Fortunately, much of the Shell space was subleased, so the market impact was less severe than anticipated.

Realty News Report: Do new hotels and residential towers downtown affect the office market?

Tim Relyea: Absolutely. New hotels and multifamily developments generate demand for retail, restaurants and services that benefit office users. As these sectors grow, they create a virtuous cycle: better amenities make downtown more attractive and encourage firms to locate nearby.

Realty News Report: Any final thoughts?

Tim Relyea: Downtown Houston remains one of the strongest central business districts in the United States. The city is unique in that it continues to attract relocations from the suburbs to the urban core. With ongoing infrastructure and mobility improvements—such as the Pierce Elevated demolition and expanded access routes—downtown Houston is well-positioned for sustained growth.

July 23, 2018 Realty News Report Copyright 2018