COVER STORY, SEPTEMBER 2011

WHEN GROUND UP IS DOWN
Houston tenants are renovating office spaces.
John Nelson

Houston has not seen substantial ground-up construction in its office market since the economic downturn. Whether it’s caused by businesses closing, relocating or downsizing, new construction is nowhere near its pre-recession productivity.

To supplement Houston’s lack of ground-up construction, businesses are getting creative in garnering their office spaces. Working with contractors and architects, businesses and landlords are taking advantage of soft market conditions to renovate space to suit their needs. An avenue some businesses have chosen is to reposition space into an office environment.

“We’re seeing a desire to put office space into old buildings and converting, because there has been 20 to 25 percent cost savings when compared to new construction,” says Pete Ed Garrett, a partner at Studio Red Architects in Houston.

Studio Red Architects renovated a warehouse facility into office space for the Houston Permitting Center, saving the City of Houston 20 percent the cost of a new office facility.

Studio Red Architects recently renovated the Houston Permitting Center for the City of Houston. The city decided to renovate an existing warehouse that saved 20 percent of the cost of building a new facility. Studio Red converted the entire 200,000-square-foot facility into office space.

Converting an asset also creates an opportunity for landlords to enhance their properties’ marketability so they can raise rents down the line.

In addition to lax construction, Houston’s office market vacancies are up compared to 4 years ago. Houston’s current vacancy rate in its office market is hovering around 16 percent, whereas it was at 11 percent in 2007.

“Businesses have been downsizing and leaving their office space vacant,” says Lisa Smith, business development manager for Warwick Construction. “Houston has had a lot of unleased space the past few years.”

Vacancy rates are declining year-to-year, though — vacancy was up around 18 percent in 2010.

There is pent up demand from tenants for quality office space, and the availability of Class A space has been alluring for landlords and businesses. There was 440,000 square feet of positive absorption of Class A office space in the second quarter, which was much more than any other class of office space. In these newly occupied structures, businesses and landlords are looking to renovate their space.

Many businesses and landlords in Houston are looking to renovate the spaces they already have too, leading them to evaluate what type of office environment they want to establish. Some of the renovations being done are simple, like upgrading fixtures. Others are more extensive, like changing the office environment from a closed office to an open one.

“Traditionally, offices were 70 percent closed and 30 percent open, but that’s reversed now,” says Greg Rhodes, manager of business development at Turner Construction’s Houston office.

Closed office plans are more expensive to construct and maintain, so businesses and landlords are renovating their spaces to a more open one, creating more natural daylight and saving money. Open office modules also help with climate control because there are not as many walls and offices to stymie ventilation.

Contractors and architects are also getting requests to move offices away from the perimeter of the building and more to the core. This technique allows for windows to be more accessible and it increases natural daylight.

Arch-Con Corp. and Morris Architects recently made capital improvements for Pinnacle Westchase at 3010 Briarpark, a 470,940-square-foot, nine-story office building in Houston’s Westchase District. After demolishing existing lobby walls and finishes, the renovations included adding new building canopies, installing Italian marble flooring, upgrading elevator finishes, installing specialty glass systems, upgrading light fixtures and adding a new front desk and wall finishes.

“Incorporating green features into older buildings is very important,” says Michael Scheurich, president and CEO of Arch-Con Corp. “There is a need to upgrade Houston’s second- and third-generation buildings to make them competitive with the new buildings.”

There are different motivators involved in renovating an office, but likely the biggest trend for Houston’s office renovations is maximizing energy efficiency and sustainability. Green design is an attractive draw for developers because it saves money on utilities, helps the environment and — most importantly for some landlords — it’s what tenants are looking for in the marketplace.

Sustainable design is so prevalent for some that it’s almost a prerequisite for renovations. LEED certification in particular has become a common goal for commercial building developers because it’s advantageous for all parties involved.

“If LEED certification is for a for-lease space, they feel like it can be more marketable,” says Chuck White, vice president/general manager for Cadence McShane Construction’s Houston office. “If it’s an owner-occupied space they like it’s the right thing to do for the environment.”

LEED EB (existing buildings) has gained traction in the Houston office market for bigger Class A properties. Class B, C and D properties are less likely to pursue LEED certification because of the inherent costs without the promise of a return. LEED EB seeks to upgrade existing buildings’ operational efficiency while minimizing its environmental impact. This is done through fixture upgrades, maintenance programs and systems upgrades.

LEED certification has moved beyond just the realm of buildings. Individual offices can now acquire LEED certification without the building having obtained it.

Contractors and architects are working to make offices more sustainable because of its lasting impact as well.

“It’s about making a better office environment,” says Gary Altergott, principal at Morris Architects. “Overall, businesses will be able to sustain a certain rein on the future increase in utilities.”

For the architects and contractors looking to make capital improvements to the office spaces, it’s not all about getting their projects LEED certified. It’s more about implementing the principles of modern office design. The most important thing for architects and contractors is to design and build these spaces in a quality manner for their clients.

“If you build quality, there’s always going to be room for that in the  marketplace,” says Altergott.

The economy, while not quite out of the woods yet, is rebounding strong in Houston, which allows lenders to let some of the funding loose for businesses and landlords. The funding has allowed them to allocate spaces and renovate even more.

“The increase in interior work is the start of a stabilized economy,” says Rhodes.

The 385-acre Exxon Mobil campus being constructed in The Woodlands has been the premier focus of the office market in the greater Houston area. It’s expected to add between 6,000 and 8,000 jobs, priming the surrounding area for booms in retail and school construction. The growth in the energy sector has helped fuel economic stability.

Also, Texas passed State Bill 1048 in June and it became effective in September. The bill authorizes government entities to enter into comprehensive agreements to construct qualifying public projects including buildings, hospitals, schools, recreational facilities and others. Work done for the government is expected to increase because of the new bill, but the funding will likely be limited due to budget restraints in many local government bodies.

Moving forward, contractors and architects are expecting to keep the momentum in the amount of renovations done to Houston’s office market. The lack of new construction and the conditions of the office market are indicative that the trend can continue.

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