Industry Bigshots Weigh In On Energy Corridor Optimism

During the first panel at Bisnow's Future of the Energy Corridor event this week, there were signs of optimism for the well-known Houston submarket. Major developers and brokers in the area are a little more tempered in their outlook, but ultimately see a lot to be excited about even now.

Chip sees a lot of his clients waiting. Future tenants are holding out for a better deal, seeking more concessions from landlords. With so many subleases available around Houston and the Energy Corridor specifically, tenants are seeking extraordinary value from leases. Chip's optimistic the market will bounce back with a "mini-boom" similar to 2010. We snapped our panel in action: Aaron, Chip, Mike, Pat, Louis, Kevin and Shane.

JLL EVP Louis Rosenthal shared some sobering statistics. There are 26 buildings in The Energy Corridor with at least 50k SF available. 20 of those have over 100k SF. He stressed that everyone is focused on cost reduction. If oil stabilizes at $40 a barrel, the market may see increased confidence as companies seek to build on the stability, but it would likely take a couple of budget cycles to be felt by the market. Louis is pictured second from the left with fellow panelists Hicks Ventures principal Pat Hicks, Colvill Office Properties president Chip Colvill and Lincoln Property Co SVP Kevin Wyatt.

With so much space on the market, Mike (here with JA Billipp's Andy Billipp) truly stood out among the panel. His company has no available space. That's largely because CORE decided not moving in the market was the best move. Two days before groundbreaking, CORE decided not to go through with a 250k building that was already planned, permitted and financed. Despite recent setbacks, Mark isn’t worried about the Energy Corridor. He sees the downturn as a vacuum, set to draw in tenants from all over Houston with great deals on high-quality assets, continuing the rapid growth in the greater West Houston area. 

Despite the price of oil, tenants still want to move west. Our panelists agree the decision-makers may still live in River Oaks, but companies are finding more of their employees headed west. The 290 market is soft due to never-ending construction complications, so The Energy Corridor remains appealing. Building ownership in the submarket is mostly institutional, with high-quality Class-A office buildings built to corporate standards, like 4 Westlake, which has 500k SF of fully furnished space laced with amenities.

With north of 10M SF of sublease space on the market, things are getting very complicated. Pat unpacked some of the complexity, saying subleases less than two years aren’t really subleases at all, they’re direct space. Landlords are not panicked over those. The 24 to 40-month range is what Pat calls “purgatory” for subleases. During that time, some landlords simply want to put their head in the sand, tenants often aren't in shape to write a check for the buyout, there are lender loan covenants that don't let you tear up the leases...the pitfalls are many. Chip adds that sublease deals are also often very dependent on both parties' credit.

Here's Trammell Crow managing director Aaron Thielhorn, CORE Real Estate managing director Mike Wyatt, Pat, and moderator Global CRE Solutions managing principal Shane Cawood.

Kevin, seen here far right with Matt Cole and Shane, is confident the energy sector will bring us out of this bad market, just as it's done in the past. The decrease in demand is only in part due to the low oil price—we're coming down from an era of incredible activity. 40% of the total space in Houston was transacted in the last six years. A $20 increase in crude at $40 will have profound effects. Things can rebound very quickly; Kevin says nothing moves faster than an oil company seeing green.

Aaron, snapped here between Cardno Haynes Whaley president Larry Whaley and TBG's Blake Coleman, sees clients looking further out, too. With such high-quality inventory in The Energy Corridor, it’s hard to to pass up. With 50% of Houston office space built 30 to 40 years ago, the new assets in The Energy Corridor are very competitive. That's why petrochemical companies like BASF and Air Liquide are moving further west. 

We snapped our moderator Shane receiving a shoeshine from Will Forte; the stand was arranged by Allen Boone Humphries Robinson. (It's a brilliant idea, we were graciously hosted by Piedmont in Enclave Place, and raw spaces can kick up dust on your shoes.)