| FEATURE ARTICLE, APRIL 2008
OFFICE AND INDUSTRIAL LEASING UPDATE
From high-rise office buildings changing hands to sprawling business complexes under construction, there is no lack of office and industrial activity in Texas. The question is: Will these new — and old — properties be able to absorb space in the current economy? Office and industrial experts in Houston, Dallas/Fort Worth, Austin, San Antonio, El Paso and the Rio Grande Valley discuss these concerns, shedding light on the ups and downs of our present economic situation and what that means for the coming years.
Houston
OFFICE
Builders are expected to ease the tight conditions in the Houston office market this year with the delivery of more than 3 million square feet of new space. Most of the new construction is speculative and concentrated in traditionally strong office-using districts, such as the Energy Corridor, Galleria and Westchase. Much of the new supply is in high-rises, enabling companies to consolidate operations that are currently scattered around the market into contiguous blocks. As such, several smaller spaces will become available, pushing the metrowide vacancy rate higher in 2008, following a decline of more than 500 basis points since 2004. Despite higher vacancy, demand for large office spaces persists, fueling rent growth and some concession burn off. Most of this demand will be exhausted during the first two quarters of the year, resulting in slower rent growth and rising vacancy rates as 2008 progresses.
The investment outlook for Houston remains bright, supported by prospects for long-term economic growth and initial yields in the mid- to high-7 percent range. Cash-heavy investors and institutions are likely to find opportunities in major office-using districts, such as Westchase and the Galleria. Many Class A buildings in these areas underwent renovation in the late 1990s to attract tenants, and leases signed during that time are coming due. Tight conditions in the market’s top-tier assets will give owners considerable leverage when negotiating leases. Some buyers may choose to alleviate risk associated with new construction by focusing on substantially leased Class B office parks, which are less effected by the loss of a single tenant. The delivery of several build-to-suit projects in recent years also may offer some sale-leaseback opportunities in the near term.
Employment growth in Houston will remain well above the national rate, as 41,000 positions are forecast to be added this year, an increase of 1.6 percent. Office users will expand payrolls 0.6 percent with the creation of 3,300 jobs. The return of speculative construction will accelerate deliveries to 3.3 million square feet in 2008, boosting office stock 2.1 percent. Last year, 1.9 million square feet of space came on line. After a 300 basis point improvement in vacancy in 2007, slower employment growth and the addition of new space will push vacancy up 70 basis points to 12.1 percent by year end. Higher rents for Class A space and relatively tight conditions will facilitate a 6.3 percent increase in marketwide asking rents to $23.60 per square foot in 2008. Effective rents are forecast to advance 6.7 percent to $20.68 per square foot.
Investors may focus on office assets in Sugar Land, The Woodlands and Katy, where infrastructure improvements are making space more attractive and tighter zoning restrictions are easing the threat of new supply.
Michael Hoffman is the vice president and regional manager in the Houston office of Marcus & Millichap Real Estate Investment Services.
INDUSTRIAL
The city of Houston’s industrial development markets are expanding rapidly. There was 5.6 million square feet of industrial space under construction in metro Houston at year-end 2007, less than the 7.5 million square feet under construction in the third quarter, but up from 3.7 million square feet a year ago. The North Far and East-Southeast Far submarkets are experiencing the most construction activity. Space under construction is 22 percent pre-leased, up from 12 percent pre-leased in the third quarter, but down from 41 percent a year ago. Deliveries of industrial space in Houston totaled 12.1 million square feet in 2007, more than double the total of 2006. Total industrial space delivered in 2007 was 33 percent leased upon delivery, slightly higher than the 31 percent rate of 2006.
In the Southeast corridor, new developments are on the rise due to the recent expansion of the Port of Houston. The submarket received a real boost with the recent opening of Bayport. In the North corridor, new developments are on the rise because of the close proximity to Intercontinental airport and its distribution of air cargo. The trade sector continues to gain momentum from recent expansion of Bush Intercontinental. Total airfreight for the Houston Airport System increased by 5.5 percent over the 12-month period ending in November 2007. Additionally, the Northwest corridor is the largest and most mature industrial market and it continues to flourish and expand with several new developments.
Net absorption of industrial space totaled 3.7 million square feet in metro Houston in the fourth quarter of 2007. The 2007 total absorption was 12.5 million square feet, more than double the 5.5 million square feet recorded in all of 2006. Warehouse/distribution absorption accounted for 92 percent of all industrial absorption in Houston in the fourth quarter and 93 percent of industrial absorption for the year. Both manufacturing and flex/R&D space experienced modest levels of absorption. Additionally, there has been positive absorption for thirteen quarters for the overall industrial market.
Significant industrial developments that are under construction in Houston and that are making a distinct impact on the industrial market are Port 225, 8103 Fallbrook Drive, Park 288, InterPort Business Park and Walgreens Distribution in the North corridor industrial. Recently, some of the major deals in the market include Rooms To Go, who bought 90 acres and will build a 1.2 million-square-foot warehouse in Katy; the approximately 1.45 million-square-foot square foot lease signed by Academy Sports and Outdoors, Ltd. at 1800 North Mason; a 500,000-square-foot build to suit for Walgreen Co. in the North Corridor market; Wilson Industries Inc., who leased 450,000 square feet in the Southeast corridor market; and Packwell, which leased 423,700 square feet in the Southeast corridor market. Old and new developers are taking advantage of the development cycle. Some of the newer faces in this cycle include Duke, IDI, Liberty Property, and Mountain West.
Industrial rents continued to show solid performance as vacancy rates declined. Industrial rents grew an average of 6 percent in 2007, up from 5 percent in 2006. Rental rates should continue to rise in 2008 as demand for industrial space remains healthy. Currently, the rental rates for distribution on new construction properties are between $4 and $5 dollars per square foot net. Older spaces are increasing and range from $2.60 to $3.80 per square foot net. The overall Houston metro industrial vacancy rate declined to 5.1 percent at year-end 2007, down 40 basis points from 5.5 percent at third quarter, and down 150 basis points from 6.6 percent at year-end 2006. The direct industrial vacancy rate is also 5.1 percent, down from 5.2 percent in the third quarter and 6.0 percent at year-end 2006. Houston’s overall industrial vacancy rate should continue to decline in the near term as demand for industrial space exceeds deliveries of space now under construction.
Darryl Noon is senior vice president, industrial services, with Transwestern in Houston.
DALLAS/FORT WORTH
OFFICE
If you want solid proof that the Dallas/Fort Worth Metroplex continues to be a strong, desirable office market, consider that most locals saw last year’s absorption of 3 million square feet of space as a ho-hum year. While economic development officials in most cities would consider that level of activity as worthy of celebration, it’s less than the 10 million-foot levels of just a decade ago.
Job growth is the metric that fuels office expansion, and the market saw more than 60,000 new jobs in 2007. The area’s economic base became increasingly diversified during the 1990s, and that diversification has increased. While we’re seeing job growth across most sectors, finance, insurance and real estate companies are the standouts. Technology and telecommunications companies continue to grow, and the oil industry is very strong, especially with development of the Barnett Shale gas field stretching across north Fort Worth into Dallas County.
Tenants are continuing to expand, but in a more disciplined manner. A decade ago, it wasn’t uncommon for companies to lease excessive amounts of space and wait to grow into it. Today’s tenants are more concerned with efficiency, so they can put more people into less space. That increased density is creating a demand for more parking, electricity and restroom facilities. We’re also seeing greater scrutiny during the negotiation process, but with professional representation on most deals, and demand and supply in a state of equilibrium, both sides remain evenly matched.
Most of the office growth is occurring north and west of Dallas itself, with communities such as Frisco, Allen and Coppell seeing extensive development. The corridor between the LBJ Freeway and S.H. 121 also is booming. The primary reason so many suburban areas are showing strength is that Dallas still has an abundance of developable land, particularly in the outlying areas, which equates to very cost-effective commercial real estate development.
Leasing costs span a broad range. Class A space in Las Colinas near the Dallas/Fort Worth International Airport is available in the low-to-mid-$20 range, while leases in Uptown can run as high as the mid-to-upper $30s. Current office vacancy rates across the market average about 17 percent (16 percent for Class A). These numbers might raise eyebrows elsewhere, but the strong absorption rates locally make them healthy levels here.
While investment activity saw record levels in 2007, uncertainty in the capital markets suggests that we’ll see a significant drop-off during 2008. Highly leased, investment-grade property continues to move, but funding sources are more hesitant to back deals in multi-tenant buildings.
Overall, the Dallas/Fort Worth market continues to be an extraordinary value for both employers and employees. With the low cost of living, affordable real estate, high-quality transportation infrastructure, and excellent weather, the market continues to draw companies and create jobs.
Blair Oden is vice president office leasing and development in Duke Realty Corporation’s Dallas office.
INDUSTRIAL
The market in Dallas/Fort Worth ended in equilibrium last year with only 9.1 percent vacancy. However, the conditions exist for a rise in vacancies in the area. If the economy weakens substantially, it is difficult to foresee a repeat of 2007’s absorption of 16.17 million square feet. Currently, there is over 17 million square feet under construction in DFW. This equates to a 2.4 percent increase in supply. Slowing or declining absorption combined with the new supply that will deliver in 2008 should push the vacancy rate into the 10 to 11 percent range until the middle of 2009.
The biggest drivers of new industrial development in Texas are the Port of Houston and the Dallas/Fort Worth International Airport. In a few years, however, the DFW Airport area will be out of land and the focus will become the South Dallas and Fort Worth areas.
New industrial developers in the area are The Allen Group, a San Diego-based developer, Courtland Development and California-based Xebec Realty.
The Allen Group broke ground last year on their first two buildings in their Dallas Logistics Hub. Courtland Development is constructing Firewheel Distribution Center in Garland and has sites along Interstate 45 in Dallas and Beltway 8 in Houston for future development. Xebec Realty has finished a two-building development in North Fort Worth.
The vast majority of new development is supplied for corporations taking advantage of Texas’ proximity to Mexico and our status as the nation’s leading export state. Average building sizes continue to grow. Xxamples of these extremely large distribution centers include Transwestern’s Port 225 development containing around 1.22 million square feet and Duke’s Point West VII containing 756,577 square feet. Currently under construction are the approximately 1.02 million-square-foot Majestic Airport Center; Grand Lakes II containing more than 1.06 million square feet, and Liberty Property Trust’s 613,250-square-foot facility at 8103 Fallbrook. All of these are being constructed with very little or no preleasing.
A major leases that has closed recently is Whirlpool Corporation’s lease of 852,000 square feet at 1101 Everman Parkway in South Fort Worth.
The Port of Houston and its I-45 connection with Southeast Dallas will be primary drivers of distribution space for the next 50 years, as will the potential inland port in Southeast Dallas. Land is available and inexpensive, so expect to see these areas accelerate their growth as development of available industrial land in the urban cores of Dallas and Houston is depleting.
Cary Krier, senior vice president for Jones Lang LaSalle, is involved in the company’s recently formed industrial services group in Dallas.
EL PASO
El Paso’s industrial market has been inextricably tied the maquila industry over the past 35 years and that continues in strong measure. Excitedly, the city on many fronts is preparing for the growth of the army at Fort Bliss and the move in of defense contractors that will support the new weapons development systems. In the next 5 years, construction should be complete on owned build-to-suit improvements and perhaps one or two spec buildings in El Paso International Airport’s planned 150-acre expansion of its Butterfield Trail Industrial Park.
Increased absorption of El Paso’s existing facilities in its many parks should soon lead to construction of spec buildings to serve as distribution centers and some small-scale specialty manufacturing. There is growing potential for Mexican companies serving the U.S and seeking facilities in El Paso. Strong growth of local manufacturers and suppliers in the building products industry to serve the housing market is driven mainly by the expansion at Fort Bliss with over 23,000 troops and their families expected to arrive in El Paso within 8 years, stabilizing a population at the fort to over 53,000 citizens.
Two significant new industrial developments include Verde Group’s Santa Teresa, New Mexico, park located on El Paso’s border with New Mexico and Mexico, and Five Star’s new planned 500,000-square-foot green commercial, retail and industrial site at the Zaragoza Bridge in Southeast El Paso across the Rio Grande River. The close proximity of each to Juarez, Chihuahua, Mexico signals their commitment to the expected growth in manufacturing. The major developers in Juarez and El Paso remain Prologis and Verde and both have long range plans for the continued growth.
The largest recent lease transactions were Copperfield Wire absorbing over 400,000 square feet of space previously occupied by Home Products and Exel Logistics occupying 200,000 square feet in Socorro, the county’s easternmost rail-served development.
El Paso lease rates currently range from $3.45 to $5.00 per square foot and are expected to climb with the increase in demand and escalated construction costs for concrete, oil and labor. Industrial vacancy rates sit at around 6.28 percent in El Paso and approximately 8.5 percent in Juarez.
Irving “Sonny” Brown is chairman of Sonny Brown Associates in El Paso, Texas.
San Antonio
OFFICE
Population and employment growth continue to fuel the San Antonio market while a stable and diverse economy insulate the Alamo City from the economic malaise felt in other parts of the country. Economic stability attracted new users to the market such as American National Insurance Company and allowed many existing businesses to grow. Although the downtown market remains flat, demand for suburban office space filled vacancies, spurred new construction and supported substantial rental rate increases.
Activity slowed slightly in 2007 but demand extended the trend to a fourth consecutive year of positive net absorption totaling approximately 432,000 square feet. The removal of nearly 300,000 square feet of mostly vacant Class C space slated for retail redevelopment allowed the citywide vacancy rate to improve to 13.1 percent. Class A properties posted a year-end vacancy of 10.3 percent.
Citywide, the average quoted rental rate climbed to $19.82 per square foot annually on a full-service basis showing an over-the-year gain of 6.3 percent. The cost of Class A space experienced an annual growth rate of 6.0 percent to reach $22.94.
New construction delivered more than 631,000 square feet of office space to the market. Relatively controlled speculative construction contributed to the office market’s improvement as each wave of development has been met nearly equally by demand.
Optimistic about San Antonio’s positive outlook, developers continue to expand the local market with nearly 1 million square feet of speculative projects currently under construction. The Far North Central submarket continues to see high-quality new growth with projects such as Concord Park Two and Plaza Las Campanas. Several value-added office projects are under construction in the Northwest submarket including The Overlook at The Rim, 4350 Lockhill-Selma, Farinon Office Building and Network Crossing. New developments along the Highway 151 corridor will bring office space to the newly emerging Far West submarket including Westpointe Business Park and Westover Office Center. Projects under construction have strong fundamentals based on the lack of large blocks of available inventory and historical demand but the list of proposed projects may require more scrutiny by developers and lenders going forward.
While San Antonio continues to outperform many areas of the country, there is no doubt that the construction of new homes is slowing to a more sustainable level. Sublease space, a leading indicator of anticipated vacancy, increased to 291,434 square feet at the end of the fourth quarter.
Aside from the adjustment in the housing market, San Antonio continues to enjoy a bright economic outlook with stable population and job growth forecasted.
Kimberly Gatley is senior vice president and director of research for NAI REOC Partners.
INDUSTRIAL
The San Antonio industrial market remains strong with increasing rates and absorption. Our local economy continues to add jobs; national industrial developers are considering San Antonio for new projects; and proximity to Mexico provide logistic opportunities for imported goods.
Union Pacific (UP) Railroad selected First Industrial Realty Trust, Inc. to develop a new intermodal terminal on approximately 300 acres in the Southwest area of town. Construction broke ground last August; completion is set for late 2008.
Port San Antonio is an inland port with Foreign Trade Zone (FTZ) and the ability to accommodate multimodal logistic operations, which include goods shipped by truck, rail or air. The port expects authorization anytime to begin operating its Air Cargo Terminal. Santa Barbara Development Services and DB RREEF, an Australian-based real estate trust, have leased approximately 62 acres from Port San Antonio. Their first project is an approximately 360,000-square-foot rail-served distribution center, which welcomed its first tenants in February. They plan to break ground on Phase II, an approximately 275,400-square-foot rail-served building, later this year.
While the Southwest area of San Antonio is seeing new development to accommodate new supply chains, the far Northeast submarket in the Schertz and Selma, Texas, area is experiencing the greatest growth in new warehouse/distribution development. ProLogis is preparing to begin construction on a 250,000-square-foot building on 55 acres; Verde Corporate Realty Services and Trinity Asset Development Company completed construction on the first two buildings in Verde Enterprise Business Park and are marketing a 216,000-square-foot building currently under construction in a 200-acre master-planned development. Trammell Crow Development owns approximately 120 acres and expects to begin construction this year on the first building of approximately 300,000 square feet. Santa Barbara Development Services and DB RREEF have approximately 188 acres in the area with Phase I of their development expected to be nearly 800,000 square feet on 50 acres. Other developers looking in the area include at least Duke Realty, Lauth and Lincoln Property Company.
Several other projects are in various stages of development throughout the city. East Group Properties recently completed Wetmore Business Center II, a three-building project that added 33,750 square feet of office/service space and 124,492 square feet of distribution space. Cross & Company expects to begin construction soon on Cornerstone Building 3. The 171,397-square-foot distribution warehouse is expected to be complete in late 2008. A private international investor will begin construction on Building 6 at Interstate Business Park. San Antonio-based Ace Mart Restaurant Supply Company will occupy 120,000 square feet of the planned 210,000-square-foot facility. ProLogis is expanding at City Park East with the addition of a 52,000-square-foot building to be occupied by Gulf Coast Paper Company and a 101,200-square-foot speculative building.
San Antonio’s industrial market ended 2007 with over 1.2 square feet of positive absorption, according to the Grubb & Ellis 2008 Real Estate Forecast. Overall, vacancy has fallen to just 5.3 percent, even with some 6.4 million square feet of new space that has come on line since 2003. The year ahead will see new speculative construction with almost 1.4 million square feet expected to come on line over the next 12 to 18 months.
Rick Stagers is vice president of Grubb & Ellis|Property Solutions Worldwide in San Antonio.
AUSTIN
OFFICE
The Austin office market is not immune to the impact of the national marketplaces’ sudden slam on the breaks, but has been able to recover more quickly than most of the country. In 2008, there may be speed bumps, but the region’s ability to move forward demonstrates its unique optimism that is the fuel for its vitality.
According to Moody’s Economy.com report, Austin ranks first in economic vitality among 381 metro areas. Highlights also include the region’s strong workforce, which is a key factor in Austin’s quick rebound. Simply put, employment growth and corporate relocations are the engines that drive the city’s office demand.
The correlation between employment and economic vitality became evident in 2001. The technology bust combined with the attacks of September 11th caused many of Austin’s major employers to downsize, sending the city into a recession. Office vacancy rates soared from single digits to more than 20 percent in 2003 and construction of new office buildings came to a halt. By 2005, the recession’s grip began to loosen, and by the end of 2007, Austin emerged as one of the nation’s strongest markets.
According to our research, overall office vacancy rates currently stand around 11 percent and are as low as 7 percent in some submarkets. In 2007, the market saw a positive absorption of 628,000 square feet of office space and rental rates enjoyed a slight increase of $0.41 per square foot, ending the year at $27.82 per square foot.
Keep a close eye on the Round Rock, Northwest and Southwest submarkets. These areas continue to see demand from the medical and technology industries for Class A office and bulk warehouse space.
There has been speculation about the potential impacts of new construction coming down the pipeline this year. According to industry reports, approximately 2.5 million square feet of new office space will come on line in 2008. Not only is it double the construction from 2007, it represents a 6-year high for the region. This amount of construction has many industry pundits concerned about over-building and question the market’s ability to absorb the new space.
While many may look at this abundance of new construction with a negative eye, others see it as revitalization. The Austin market is strong — the city’s unemployment rate is one of the lowest in the country and it continues to draw corporate relocations. In January, both Google and PayPal announced plans to relocate to Austin, and according to industry reports, the city can expect more than 77,000 new jobs over the next 5 years.
Ken Wheeler is vice president, director of property management, for Burke Real Estate Group in Austin, Texas.
INDUSTRIAL
In Central Texas and the surrounding areas, we are seeing increased movement toward raw land development out of necessity due to existing industrial inventory previously absorbed or converted to alternative uses. With this trend, we are also experiencing an increased square footage requirement for bulk manufacturing new product. Larger manufacturing/distribution tenants, in addition to rising construction costs, are causing developers to build larger footprints to accommodate current and expansion needs under one roof. Projects that are accommodating this trend include, Live-Oak Gottesman’s TechRidge development (3 buildings each totaling over 240,000 square feet), IPC’s Northeast Crossing (179,200 square feet), Lincoln’s Vista Park (178,254 square feet), Verde Corporate Realty’s Verde Springbrook Corporate Center (144,000 square feet) and Endeavor’s Southpark Commerce Center (198,000 square feet). As the demand on this type of industry increases, we anticipate the need to “build bigger” to continue.
Over 2 million square feet of space is currently in the pipeline with scheduled completion dates within the year. The majority of the new development is occurring in the south and southeast markets. Proximity to the airport, large tracts of land and the new Highway 290/71 completion coupled with the 130 expansion make this area very attractive.
As the demand has increased we have seen new development companies emerge including, St. Croix Capital Corporation, Verde Corporate Realty Services and Stream Realty Partners. Landlords and owners are seeking credit-worthy, established tenants to occupy this space. The public sector, including state and supply chain management (such as AMD, Dell and Cisco) are the types of companies that tend to dominate the industrial market in the Austin market. Large leases executed recently include the 119,000-square-foot lease at Southpark Commerce Center Phase IV with Travis Association for the Blind; Span International’s 128,000-square-foot lease at Springbrook Corporate Center; and Heliovolt’s 122,400-square-foot facility at Expo Center 8.
The citywide rental range for the market is $4.20 to $16.50. Warehouse and manufacturing rates fall within the $4.20 to $12.00 range while flex space ranges from $5.40 to $16.50. Year-end city-wide vacancy rates were 11.45 percent, minimally higher than the previous quarter’s 11.40 percent. With approximately 20 percent of the current development pipeline already pre-leased, the demand to continue construction should remain steady. The Austin/San Antonio IH-35 corridor will continue to be the hot spot for development over the next few years. In the near future, as 130 continues to expand, this corridor should also see increased development.
Greg Mayberry is first vice president with CB Richard Ellis in Austin, Texas.
RIO GRANDE VALLEY
INDUSTRIAL
The South Texas/Mexico Border continues to do well despite a real estate recession that is impacting the residential market. While the rest of the country is starting to experience a slowdown in commercial and industrial markets, the industrial scene is still optimistic in South Texas. Mexico is continuing to make investments to their infrastructure, which will keep the industrial market strong on the South Texas/Mexico Border.
In 2007, Mexican President Calderon unveiled his administration’s National Infrastructure Plan (NIP) aimed at boosting Mexico’s international competitiveness. Mexico will have $141 billion in bid proposals over the next 5 years for about 300 key projects. These projects include five new seaports, railways, airports, and highways that will positively impact the Texas/U.S. Border.
One of the largest deep sea water ports in the Western hemisphere is being constructed on Mexico’s west coast in Lazaro Cardenas. This joint venture with China will be the biggest impact to the area; the new seaport will significantly shorten the time of delivery of Asian products to the U.S., reducing the cost of logistics.
Reynosa, Mexico, presently has an industrial market of approximately 27 million square feet of space and growing. The vacancy rate of industrial space in Reynosa is at 6.7 percent. Lease rates for shell/non-air-conditioned space ranges from $0.36 to $0.42 per month. Air-conditioned space is at $0.42 to $0.48.
The McAllen Economic Development Corporation expects that many companies in the Reynosa, Mexico, area will continue to grow. The EDC estimates that there will be about 700,000 square feet of space to be absorbed in 2008, solely to expansions. Last year there were about 900,000 square feet absorbed on expansions alone. Counting new industrial leases and expansions of present companies, Reynosa will continue to grow between 1.5 million to 2 million square feet per year.
On the Texas side of the U.S./Mexico Border, growth is projected to be steady and not at the accelerated growth that the border area has experienced in past years. The McAllen MSA presently has almost 17 million square feet of industrial space. The vacancy rate is a healthy 6 percent compared to an unbelievable 1 percent vacancy a year ago. Industrial lease rates in the McAllen MSA are the same as a year ago.
While the industrial growth on the U.S./Mexico Border continues on a healthy pace, there are two dark clouds in the horizon. The first is a proposal by the Mexican government for a new Mexican Asset Tax that could dampen the future of the maquiladora industry in Mexico. This tax could significantly harm U.S./foreign companies operating maquiladoras; it would double the tax that maquiladoras pay to the Mexican government to a rate of 17.5 percent flat fee by 2010.
The second dark cloud could be the U.S. presidential election results. The outcome of this important event would decide if NAFTA gets to be re-negotiated and second what will happen to capital gains. The re-negotiation of NAFTA could be a disaster to Texas and the U.S./Mexico border. A modification to capital gains could impact the countries economy.
Adrian Arriaga is owner of AAA Real Estate & Investments in McAllen, Texas.
OFFICE
Sixty years ago, the Rio Grande Valley was a rural, agriculture-based economy characterized by sporadic growth. Today, the area has been transformed into a major international trade area by developing first-rate commercial, retail, office, industrial, medical, retirement, and educational facilities. The promotion of international retail trade, tourism, and manufacturing has been the most successful along the U.S./Mexico border. The Rio Grande Valley has enjoyed amazing growth, due in part to a very strong relationship with the cities in northern Mexico.
In 2007, McAllen ranked 15th in the Top 20 Cities in Texas in terms of sale tax collections, number one in total retails sales per household and number three in sales tax collections per capita.
The dollar value of trade crossing by cargo trucks through the Valley’s ports of entry have risen to the sixth most active border crossing point along the U.S./Canada or U.S./Mexico Border. From 1995 to 2006, the Valley’s share of NAFTA trade increased 168 percent from $11.1 billion to $31.6 billion.
With all of this activity, it could lead one to believe that there is a large and growing office market in the Rio Grande Valley. Unfortunately, the opposite is true. With the exception of the medical services arena, which is substantial, the general office market is relatively flat. The reason is simple — there are more than 250,000 square feet of vacant Class A space in the McAllen/Edinburg area alone.
Forecasts for 2008 do not suggest any material change in the status. Lease rates among the Class A buildings are between $16 and $21 per square foot depending on many variables. New executive suite space has been added to the market recently, and they are having good success. Small offices within a very upscale complex are generating substantial rental income, due mostly to the services that provided and ease of entry and exit.
Michael Blum is partner and managing broker with NAI Rio Grande Valley in McAllen, Texas.
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