HOUSTON – For commercial real estate professionals who specialize in Houston office buildings, this year’s Thanksgiving will feel especially rewarding.
After a meager $300 million in office building sales in 2016, annual transaction volumes in 2017 are on pace to reach multiple billions of dollars by year-end.
And more closings remain pending. Before the calendar turns, Brookfield Asset Management is expected to complete its $875 million acquisition of Houston Center in downtown Houston. HFF is marketing the sale of this four-building, 4.2 million-square-foot office and retail complex.
When oil prices plunged, the market for Houston office buildings suffered. Widespread layoffs at energy companies in 2015 and 2016 sent vacancy rates sharply higher, and significant blocks of office space were offered on the sublease market.
In 2017, however, the prevailing view is that the office cycle has bottomed out. Oil prices have stabilized, job growth in Houston is improving, and the market looks poised for a rebound.
Notable Houston transactions in 2017 include:
The Canadian investors: Institutional buyers from Canada played a major role in the turnaround. In April, Canadian investors acquired a 49 percent interest in Greenway Plaza and Phoenix Tower from Parkway Inc. for $512 million. Then in June, the Canada Pension Plan Investment Board announced a $1.2 billion purchase of Parkway, acquiring its 8.7 million-square-foot portfolio that included Greenway Plaza, Post Oak Central, San Felipe Plaza and CityWest Place.
Early-market momentum from Spear Street Capital: California-based Spear Street Capital helped set the tone early in the year by purchasing three Houston properties—5 Houston Center, Energy Center I and 515 Post Oak Boulevard—for $272 million. A few weeks later, Spear Street purchased the Exxon Upstream Research complex on Buffalo Speedway for more than $50 million. Those deals helped break the ice and catalyzed further activity.
Nitya Capital redevelopment: A recent closing saw Nitya Capital acquire the 208,000-square-foot Norfolk Tower from TA Realty in a transaction brokered by HFF. The property, in the Southwest Freeway and Greenbriar area, was expected to trade for roughly $35 million. Nitya, primarily a multifamily investor in Houston, plans to redevelop the building and rename it Nitya Tower.
These and other deals signal that Houston investment sales have returned to active levels. The city is no longer being avoided by investors; at midyear, sales activity was up 300 percent, according to Avison Young.
Market fundamentals and leasing outlook: What about leasing fundamentals? Bruce Rutherford, a Houston commercial real estate veteran and leader in JLL’s Global Energy Practice, expects further improvement in 2018. Office construction is moderating while oil prices show signs of stabilization.
“We are feeling this cycle is starting to turn,” Rutherford says.
Still, a full recovery—defined as rising rents, increasing occupancy, sustained positive absorption and a normalized level of sublease space—remains difficult to forecast with precision. A genuine resurgence in which energy companies expand rather than contract their office footprints may take longer to materialize.