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Wednesday, August 29, 2018

Higher Quality, Smaller Footprint

By Rand Stephens (Houston)

Despite Houston’s thriving economy and low unemployment rate, the city has one of the highest office vacancy rates in the country. The office vacancy rate for the second quarter of 2018 is at 18.3% (includes sublease’s available vacant space), which hasn’t been that high since the 1980s. With almost 40 million square feet of direct vacant space currently unoccupied in the Houston area, why are we seeing an increase in activity for new office development? And, why are employers opting to move to these new buildings?  There is a workplace revolution underway and companies are responding.

Employers are competing to attract and retain top talent by offering flexible work options, in-house fitness centers, cafés and outdoor patios because studies have shown that is what employees want. Research also shows that employees are spending less time working at their desks and more time in kitchens, conference rooms and other collaborative areas. This trend is influencing office space design and impacting the amount of space being leased. Employers now have an opportunity to save money on office space by designing collaborative amenity-rich work environments with less square footage per employee while scoring the best and the brightest members of the workforce.

This trend is sparking an increased demand for superior space, and companies are leaning toward newer more efficient buildings with state-of-the-art interior design to capitalize on the shift in employees’ demand for a better workplace experience. However, the overall space needed ends up being smaller, resulting in a better value for the employer. This is not only happening in Houston, but a trend that is happening around the country, as noted in Avison Young’s Mid-Year 2018 Office Market Report.

This flight-to-quality is driving some demand for new office buildings. It’s not obvious that this would be the case in a market with an abundance of available space, but Houston’s class A building set is primarily 1980’s vintage.  So, if a company can move to a new high-quality building to satisfy its employees -- while reducing its space per employee --then it looks like an attractive solution.

Some new upscale projects underway in Houston include Skanska’s Capitol Tower at 811 Rusk St. and Hines’ 47-story tower on Texas Ave. Capitol Tower’s soon-to-be tenant in 2019, Bank of America, has preleased 210,000 sf –  that’s a 77,000-sf decrease from their previous offices. Vinson & Elkins will also be decreasing their office footprint from 338,920 sf at First City Tower to 212,000 sf at the new Hines building. United Airlines left their 360,000-sf dual offices to a consolidated 225,000-sf office at 609 Main. Preleasing these new projects and renovating heritage buildings is key to stabilizing the Houston office market, as high-profile tenants continue to vacate their older office buildings and opt for newer, modern buildings. As the workplace environment adapts, so will the office market.

 (Rand Stephens is a Principal of Avison Young and Managing Director of the company’s Houston office.)

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