Has the Energy Corridor Peaked?

The Energy Corridor has absorbed 4M SF in the last three years, keeping occupancy well above 90%. That absolute sprint may be winding down, but even with a 5% increase in vacancy, it'll remain one of the strongest submarkets in town.

At Bisnow’s Future of the Energy Corridor event Friday morning, Lincoln Property SVP Kevin Wyatt said he had projected it would take three years to lease up Energy Crossing I when the firm bought it in 2010. It took 15 months, and an amazing pre-leasing pace spurred Lincoln to expand the design of Energy Crossing II. Now the submarket is slowing to a sustainable growth of 3% to 5%. Occupancy has dropped to about 92%, and he says we’ll probably stabilize around 87%, which is a healthy stat and keeps rents increasing. That said, he’s probably not going spec on his next project. 

In the 18 months since our last Energy Corridor event, it’s had double-digit rent growth and construction has doubled (but it’s 60% pre-leased), says Moody Rambin managing director Bob Cromwell. He says tenants’ flight to quality is expanding; now even service companies (which have always been Class-B users) are in the game—look at NOV going into a new A building. Meanwhile, Class-B buildings have to upgrade to stay relevant. Parking is one of the biggest issues for older buildings—most were built at 3:1,000 but 4:1,000 is the new normal. Pictured: 700 attendees joined us at the Omni West Houston.

Hicks Ventures principal Pat Hicks (pictured with his daughter, Transwestern’s Sydney Hicks) says the good thing is the delta between -A and -B rates gives you money to renovate older properties. Moderator Q10 Kinghorn, Driver, Hough & Co principal Ray Driver called Pat a renegade for his penchant to buy and redevelop while everyone else is building new—Hicks Ventures just kicked off its major renovation at 16900 Park Row to help it compete.

It’s smart to get started on those Class-B upgrades now; Mac Haik Enterprises director of leasing Steve Bryant says he’s watching M&A activity among oil and gas companies—consolidated companies often look for big Class-A spaces, and leave Class-B vacancies. Steve says the wave of development means tenants have more options. That’s made them lose their urgency, and although it’s still an active market, deals are taking longer. Here’s Steve with Ray, who joked his firm changed its motto from “growth through relationships” to “we just give free money away.”

The Energy Corridor is even more popular to outsiders than to local companies, says Avison Young principal Charlie Neuhaus. The submarket is in the discussion for 85% of existing Houston companies looking for new space, but it’s in the discussion 100% of the time for newbies. He says amenities and commute are especially important to people entering Houston for the first time, and both really need to be a focus moving forward. Drive time has been skyrocketing—two years ago, you could get from Pin Oak to Downtown in 20 minutes. Last year, that leapt to 37 minutes, and he’s expecting another big increase this year.

EE Reed Construction VP David Zebold says his firm has built 2.2M SF in the Energy Corridor in the last 18 months. Construction costs rose 4% to 6% in high-rise product, largely thanks to a 40% bump in concrete pricing. That has a huge impact on us--Houston is placing 11M yards of concrete a year, or 50,000 yards daily (and that’s excluding roadwork). To keep that in perspective, one truck carries 10 yards—that’s 5,000 trucks each day. Construction itself has slowed—it took him 14 months to get transformers for one office project.

Wolff Cos EVP/Energy Corridor District prez David Hightower agrees transportation is the Corridor’s biggest challenge—its new 20-year plan is looking at public transit (including a circulator running through the Addicks Park & Ride) and making the area more bike friendly and walkable.

To celebrate Halloween, the panelists tossed candy to the audience…

…And Pat came dressed as Elvis.