Downtown Houston Skyscrapers: Q&A with Tyler Garrett of Transwestern
Tyler Garrett
HOUSTON – (Realty News Report) – Houston’s central business district office market has experienced significant challenges. With roughly 2 million square feet of sublease space available, the downtown vacancy rate hovers near 20 percent. New developments, such as Hines’ project on the former Houston Chronicle site, will add more inventory and increase pressure on existing buildings. Despite this, downtown remains appealing to companies because of its central location and iconic properties like Pennzoil Place. To understand the market’s direction, Realty News Report spoke with Tyler Garrett, vice president of Transwestern’s Houston office division, who oversees leasing citywide. Over a 13-year career, Garrett has leased about 2.5 million square feet valued at more than $750 million. He joined Transwestern in 2016 after leading leasing efforts at Skanska.
Realty News Report: What is happening in the downtown Houston office market? Vacancy is at its highest level in years. Why are vacancies continuing to rise?
Tyler Garrett: Vacancy is indeed at levels not seen since the 1980s. The roots of today’s situation date back to that era: much of downtown’s skyline was built in the early 1980s, and when the energy downturn and savings-and-loan crisis hit, the market stalled. For more than a decade, little new office construction occurred in the Central Business District, so tenants didn’t have many opportunities to upgrade to modern space. When newer buildings became available, tenants showed a willingness to pay more for high-quality, modern offices. Over the past 16 years, new buildings in the Central Business District have performed well even through cycles. That pattern continues now: despite the energy downturn, firms like Hines and Skanska have moved forward with new towers. This trend has been tough on older, undifferentiated buildings—especially those in marginal locations or lacking standout features such as floor-to-ceiling glass or distinctive architecture. Some of those properties will struggle to regain their former status. On the bright side, we expect vacancy to peak soon: recent improvements in the energy sector and job growth point toward positive absorption within the next six to 12 months.
Realty News Report: Are companies shrinking office footprints per employee, increasing telecommuting, or relocating firms like ExxonMobil moving to the suburbs driving vacancies?
Tyler Garrett: The energy downturn forced a strong focus on efficiency in oil and gas. Combined with technological advances, the industry now requires fewer people both in the field and in office roles to produce the same or greater output. Prior to the downturn there was a hiring surge that later had to be reversed for companies to remain viable. These structural shifts have reduced demand for office space.
Realty News Report: When do you expect the downtown office market to recover—2020? 2021?
Tyler Garrett: We appear to be near the bottom of the downturn now. We anticipate a slow, steady recovery beginning in 2019.
Realty News Report: Transwestern has represented Pennzoil Place’s owner for years. How is leasing progressing?
Tyler Garrett: Transwestern has leased and managed Pennzoil Place since 2009. Pennzoil no longer occupies the building, but leasing is progressing well and we will be announcing new tenants soon. Pennzoil Place was ahead of its time in many ways: it features floor-to-ceiling glass, narrow window mullions, and restrooms accessible from both sides of the core. Those characteristics are popular in new construction today, and Pennzoil Place has benefited from them since it opened in 1975.
Realty News Report: Downtown, the Energy Corridor and Westchase were hit hard when oil prices collapsed in 2015–2016. Sublease space remains elevated and vacancies are still high. How long until recovery, and what will prompt the turnaround?
Tyler Garrett: The Energy Corridor tends to be the first to feel the impact and the first to recover because it closely tracks the energy industry. While employment levels may not return to their previous highs, productivity and production are at record levels. Some major companies have shifted to owning campuses instead of leasing, which changes absorption patterns. Sustained, profitable energy pricing is the key to recovery, and the market showed encouraging signs through 2018. Continued stability in energy prices will support recovery across these submarkets.
Realty News Report: If Class A space is hard to fill, what will happen to Class B and C properties? Will they be repurposed?
Tyler Garrett: Many Class B and C buildings will likely need to convert to other uses. Competing purely on price is not always feasible for landlords who lack the capital or willingness to engage in aggressive rent competition. Adaptive reuse—converting offices to residential, hospitality, or other functions—will be a realistic option for many older assets.
Realty News Report: Are concessions increasing to lease space? What is a typical amount of free rent being offered?
Tyler Garrett: Concessions vary by submarket and building. A useful rule of thumb for new leases is roughly one month of gross free rent per year of the lease term, though actual offers depend on many factors including tenant credit, lease length, and local market conditions.
Realty News Report: Downtown is adding more residential units and hotels. Will that affect the office market?
Tyler Garrett: Absolutely. The Central Business District is becoming a genuine live-work-play neighborhood. Multifamily and hospitality development is spurring retail growth. High prices on other inner-loop retail corridors have made downtown an attractive value for restaurants and bars. Areas like the north side of Main Street and parts of the east side of downtown are evolving into entertainment destinations, which will enhance the appeal of downtown office locations.
Realty News Report: Where do you see downtown in the next 10 years—will it be robust or in decline?
Tyler Garrett: Downtown is in a stronger position than it has been in decades. Street-level activity has increased with more sporting events, restaurants, and entertainment options than were present 20 years ago. Plans to lower the Pierce Elevated section of Interstate 45 should further benefit downtown and Midtown by reconnecting neighborhoods and improving accessibility. One challenge remains the underground tunnel system, which has tended to segregate uses: sites with tunnel access favor office development while those without lean toward multifamily or hotel projects, limiting interior street-level retail. A move toward new office construction without tunnel access could encourage a more diverse mix of uses and create an even more vibrant downtown Houston.
