COVER STORY, JANUARY 2007

A STRONG RECOVERY
Despite recent challenges, the Texas office market is making a fast recovery.
Stephen O’Kane

Over the past few years, Texas has suffered economic setbacks, including a depressed energy market and rising vacancies. Despite these recent challenges, developers and property owners are discovering a new life forming within the office market. Rents are rising and vacancies are dropping, giving developers new opportunities to cater to this important market in Texas.

The renewed activity in Texas can be seen by the quantity and quality of office projects being developed in Texas. Throughout the Lone Star State, developers are noticing a rise in interest in new office developments with three major markets — Dallas/Fort Worth, Houston and San Antonio — leading the way.

“After a debilitating technology bust, a severely depressed energy market and a shaky post-9/11 airline industry, Texas is now back on-track and showing signs of significant recovery,” says Clint Harrington, executive vice president of Texas and Louisiana for Equastone. “This recovery is promising to be much more sustainable than previous cycles due to a more diversified economy and business friendly environment that is able to attract large companies like Verizon, Toyota, and Washington Mutual among many others. Energy prices are now stabilized and show no visible signs of dropping significantly in the near future.” 

So exactly what types of office properties are showing up? Developers are finding that companies want environmentally friendly and energy-efficient buildings with state-of-the-art amenities.

“We are responding to these expectations by providing a variety of features, such as raised access flooring, larger floor plates to accommodate more employees per square foot, under-floor air distribution that allows each office or workstation to have individual HVAC controls and more parking spaces per square feet of space,” says Jake Ragusa, senior vice president of Koll Development Company (KDC).

KDC is currently involved with several new office projects throughout the state. One of its larger projects is the new headquarters for Blue Cross and Blue Shield. KDC is developing a 1 million-square-foot facility for the company in Richardson, Texas. The project is set to break ground in the third quarter of this year with an expected move-in date in early 2010.

Koll Development Co. (KDC) is developing Intellicenter, a 200,000-square-foot office project in Irving, Texas, that is valued at $30 million.

The company also is involved with another large project in the Dallas/Fort Worth area, Intellicenter. The 200,000-square-foot facility, located in Irving, will feature efficient floorplans, high-density parking and raised access flooring. The project is valued at $30 million. KDC is developing another Intellicenter in Houston featuring the same amenities but on a slightly smaller scale. The facility in Houston, which is valued at $25 million, will span 150,000 square feet.

Equastone also is present in the Dallas/Fort Worth area with five major properties. The largest of these is VHA Place, which is located at 220 E. Las Colinas Blvd. in Irving. The 317,472-square-foot building is located within the larger Las Colinas development, which offers championship golf courses, hotels and restaurants. The facility features an adjacent eight-story parking garage with ground-floor retail.

“Tenants are looking for high-quality, functional space in well-located areas that are in close proximity to housing, freeways, suppliers, services or even competitors,” says Harrington. “Equastone targets assets in the traditional office markets of Texas in in-fill locations that are close to the growth areas of a city.”

Granite Park Three, a project of Granite Properties in the Dallas/Fort Worth area, spans 443,000 square feet.

Granite Park Three is another significant office project offering convenience and amenities in the Dallas/Fort Worth area. The 443,000-square-foot development of Granite Properties is valued at $75 million. Granite Park Three, which was completed in October, features convenient access to highways and nearby retail and restaurants.

“Dallas/Fort Worth may be the shining star of the Texas recovery with the third highest job growth in the nation,” says Harrington. “Approximately 92,000 jobs have been added in the last year. Ericsson, Verizon, Fujitsu, Cisco, Pier 1 Imports, Lending.com, Countrywide Financial and Cuna Mutual Group have all decided to expand or relocate to Dallas/Fort Worth. One of the most telling signs of recovery in the area is the net absorption during third quarter 2006, 1.6 million square feet. Both occupancy and rents have steadily been on the rise in the Dallas/Fort Worth area.”

Moving south to Houston, the velocity of recovery is not slowing down. Numerous office developments are starting to emerge in order to provide the necessary accommodations for growing businesses in the area.

Duke Realty Corporation is developing Sam Houston Crossing One, a 159,175-square-foot office facility located along West Sam Houston Tollway North in Houston. The building, which is scheduled for completion in July, will feature extensive landscaping, ample parking and access to the Willowbrook retail area.

“Houston’s overall market occupancy is pushing 87 percent. The Energy Corridor and Westchase area occupancies are in the mid 90s,” says David Hudson, vice president of leasing and development for Duke Realty Corporation.

Granite Properties is currently involved with one of the major projects in Houston adding to this growing occupancy percentage. Two West Chase, a 325,000-square-foot office property featuring access to highways, retail and restaurants, is valued at $65 million and is scheduled for completion in April 2008.

Kirkwood 3, a project of Equastone, is another prominent office development in the Houston area. Located at 11757 Katy Freeway in Houston’s Energy Corridor, Kirkwood 3 spans 280,435 square feet and offers access to Interstate 10 and the Sam Houston Toll Way System. Plans include an elevator, corridor renovations and a parking ratio of four spaces per 1,000 square feet on rental space.

Equastone’s One International Centre is located at 100 NE Loop 410 in San Antonio and spans 298,942 square feet (right).

“Houston is now ranked number one in the nation for new business growth by the American Business information study,” says Harrington. “Houston is considered the “Energy Capital of the World” and houses 29 of the nation’s 100 largest publicly traded energy corporations. Many major energy corporations such as ConocoPhillips, BP American and Shell Oil are expanding and consolidating operations in Houston. Equastone’s property in Houston, Kirkwood 3, is located in the Energy Corridor, which was one of the top three Houston area submarkets with the greatest amount of absorption.”

Equastone is largely involved in the San Antonio market as well with One International Centre and North Central Executive Tower. One International Centre is located at 100 NE Loop 410 and spans 298,942 square feet. North Central Executive Tower, which is located at 1777 NE Loop 410, spans 256,137 square feet. Both properties offer convenient access to the San Antonio International Airport and the 410 Loop, and North Central Executive Tower offers gated parking, a gym, a café and on-site storage.

Equastone’s Centennial Towers is located in the North Central submarket of Austin, Texas, and spans 155,604 square feet.

The three major markets of Dallas/Fort Worth, Houston and San Antonio represent the growth that is happening throughout other areas of the state. Austin also is seeing new projects emerge and Equastone is involved in this market as well. The company currently has five projects in the area — Centennial Towers, Northview Business Center, Summit Park, Southeast Commercial Center and Cameron Creek. Centennial Towers is located at 505 E. Huntland Dr. in the North Central submarket and spans 155,604 square feet. Amenities include an on-site deli and a fitness center. Northview Business Center spans 254,705 square feet, followed in size by Summit Park at 96,950 square feet, Cameron Creek at 50,021 square feet and Southeast Commercial Center at 34,514 square feet.

With the amount of business growth in Texas right now, developers are finding the office market to be recovering, and quickly. There are no signs suggesting that this trend will end anytime soon.

“Market watchers believe the current recovery in Texas will be more sustainable than previous cycles due to the fact that the state’s economy is now more diversified, and that means less susceptibility to wild swings in oil prices,” Harrington says.

“With the growing concern for the environment and rising energy costs, LEED certified buildings will eventually dominate the market,” says Ragusa. “Although it initially costs $3 to $5 more per square foot to develop a LEED certified building, the cost is quickly offset by energy savings. Tenants usually recoup the cost within 12 to 18 months. We continue to see more of our corporate tenants requesting ‘green’ features.”

“With our job creation and focus on the energy industry, Texas should be a great location to continue office development,” says Hudson. “Office development will continue to focus on convenient access to employees and potential employees. Recruiting will be a big issue so access and pleasant work surroundings will be a big key.”

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