Uptown: One of Houston's Strongest Submarkets But Needs Mass Transit

Uptown/Galleria was a 24/7 mixed-use environment before the phrase was even coined, so it’s no surprise it’s one of the strongest submarkets in Houston. At Bisnow’s Future of Uptown/Galleria event yesterday, the experts laid out what’s doing well and what we can expect down the road.

Office is the muscle, retail is the heart and residential is the soul of Uptown, according to Uptown Houston District director of research Bob Ethington. We snapped the Uptown District team at our event yesterday: president John Breeding, Lauren Anderson and Bob (far right) with our moderator, First American Title VP David Crawford. When Sakowitz opened in Uptown in 1959, people said they’d lose their shirt because it was so far outside of town. Now this is the premier retail area in Houston: Occupancy is just a few basis points shy of 100% and rents are escalating. Although retail spurred development of Uptown, John says residential has driven the submarket’s growth since the ‘90s. There’s $1.8B of residential construction underway there. And although it didn’t make Bob’s list, Uptown is Houston’s hotel district, with three times the revenue of the next closest hotel submarket.

Of course, our panel discussed the Post Oak buses. The largest detractors to the plan have been retailers, which understandably don’t want the disruption from the process. But Zadok Jewelers owner Jonathan Zadok says not doing it could be “the destruction of Post Oak.” He’s one of multiple retailers or retail landlords on the Uptown board, and says he’s excited that the plan calls for setbacks on Post Oak to shrink from 25 feet to 10 feet, which will put it right on the curb, like on Fifth Avenue or Michigan Avenue. And although people say no one will walk in Houston because it’s too late, he’s already seen foot traffic increase since Whole Foods opened. (He walks himself, although occasionally people pull over to ask if he’s OK and needs a ride.) Besides, people walk all the time in cities with much worse weather than Houston. (Winter in Chicago, anyone?) Pictured are Jonathan, MFT Interests president Lisa Simon, Tanglewood Corp president Kendall Miller and CBRE’s Wes Breeding.

Kendall says the key is to not reduce auto capacity—other places have hurt their retail and residential by cutting down car access. He’s also an Uptown board member and assured the audience that the bus plan will not in any way reduce lanes, turning ability, or even timing of lights for drivers. Kendall knows that his Post Oak Shopping Center (with the Maggiano’s and Container Store) is underdeveloped—at this point, anything that’s one story on Post Oak is. He plans to eventually do something very special on that site, and says Post Oak and Westheimer will become the “emotional center of Houston.” Lisa (whom we found with her son, MFT’s Glenn Clements) loves that the developers in Uptown are emotionally invested and focused on longevity and value to the community. Many are from families who've been building in Uptown for generations—for example, Kendall's grandfather was one of the submarket's founding developers.

The Galleria is a compelling place for office tenants, says Cousins SVP Bob Boykin (whom we snapped, right, with Jacobs’ Ford Hubbard). Rents are competitive with other submarkets, ad valorem taxes are lower than the CBD and the amenities are unmatched. Plus, people want to live there, which is good for employee retention. (It’s a good fit for people moving in from other major cities—his nephew and wife moved to Uptown after 10 years in Manhattan and feel right at home.) So it’s no surprise that major tenants like Apache have shown long-term commitment. (It’s been there since ’91.)

Transwestern EVP Eric Anderson (here with HFF’s Robert Williamson) says Uptown will face challenges short-term, but its energy exposure is limited, so he doesn’t expect a huge impact. The average Uptown tenant is 7,800 SF and very few are engineering or oilfield services companies. That same small tenant size that protects Uptown now is one reason Eric doesn’t think we’ll see any more new office development for a long time. Most developers want a large tenant to start construction, and it’s hard to find one in the Galleria, and even harder without mass transit. Long-term, he thinks it’s one of the most fundamentally sound submarkets in Houston if not the US…as long as we address the mass transit issue.

TRC Capital Partners is re-evaluating its plan to do more office in Uptown, says TRC Capital Partners CEO Steve Lerner (right, with Lehmberg & Associates’ Gary Lehmberg). It’s going forward on a hotel next to BBVA Compass Plaza (a hotel flag has been chosen and the team is heavy in redesigning that project), but even though a second office tower is designed and permitted, TRC could do residential (rental or condo) there instead if it doesn’t find a 100k SF anchor tenant. BBVA Compass Plaza is a great example of the draw of Uptown, Steve says. BBVA always wanted to be on Post Oak because it thought it was the best positioning for an international firm. (It still took three annual proposals to get them to sign onto his development, Steve says.) The new owner, Masaveu, is also an international group—Steve says it’s a sophisticated investor and it only wants trophy properties in international markets. Masaveu approached him about buying the property, and it only took 46 days from LOI to funding and closing.

Here’s our full Uptown panel: Kendall, Eric, Steve, Jonathan, Lisa, Bob and David. A couple of our experts mentioned their excitement about the upcoming Dinerstein project at the northwest corner of Post Oak and San Felipe. Steve says the multifamily community will have 30k SF of retail. BBVA Compass Plaza showed the wild success of putting retail at the base of another use in Uptown. Although the retail spots in that property don’t even face Post Oak, Caracol is one of the highest-grossing restaurants in town. Jonathan is thrilled by TRC and Dinerstein's ground-floor retail, saying it's important for developers to keep up that trend going forward.