Office space is taking longer to lease and sell while available square footage is increasing in The Woodlands area due to reluctant tenants.
“It’s pushing 15 percent for Class A [space] compared to 5 percent a year and a half ago,” said Jeff Beard, owner of J. Beard Real Estate Company.
Developers are building offices on a speculative basis with no tenants or occupants yet, Beard said. They then look to the market to fill the space after construction is completed.
“Some of that is related to the energy sector,” he said. “The other item is that you had new construction when there was very limited vacancy. Developers and users of office space were building and constructing—and that new space is now coming online—and so there are a combination of factors that allow for an increase in vacancies or the increase in available space.”
Houston-based Stream Realty Partners, which offers leasing, property management and development services, developed and owns Sierra Pines II, a six-story Class A office building located on Sawdust Road. It opened in January 2015 on a 100 percent speculative basis and is 20 percent leased, said Paul Coonrod, Stream’s managing director and partner.
“It’s one of toughest times to deliver an office building over the past several years because of the price of oil starting to rapidly decline,” Coonrod said.
He said an office building can expect to see leasing at 80 percent in a stabilized market.
“For us, it’ll just mean it’ll take longer to lease out the building,” Coonrod said. “Large tenants are not doing anything right now—not making decisions to either renew or relocate. When there’s a tremendous amount of volatility, they are just waiting until they have more confidence in the outlook of their business over the next couple of years.”
Coonrod said he is confident the Sierra Pines II project will still be a success.
“We definitely still have a number of tenants that we’re talking to that could catch us up to where we could be ahead of where our initial schedule was,” he said. “You can land a medium-size tenant or two, and then you’re looking at an almost stabilized office building.”
On Sawdust Road near The Woodlands, Havenwood Office Park is due to be completed in March, Everson Developments Founder and President Brent Everson said. Developers need to try to get a feel for what a tenant needs to attract new ones, he said.
Everson said the downturn in the market is a chance to appeal to tenants who are unaffected by the volatility of the oil and gas sector. He said when prices are affected by a downturn, it is a good time to buy assets at a lower price.
“That’s an opportunity,” Everson said. “When real estate was doing really well prior to the oil prices collapsing, I remember saying to my partners there will be a down cycle, and that’s an opportunity. We’re looking for those opportunities.”
Everson said companies need to recalibrate to the environment after a downturn before returning to their normal level of business activity.
“As long as employment growth continues in sectors outside of the energy business, I think you’ll see a demand for some office space, albeit demand is down on the energy side of things,” Beard said. “In our estimation, in the commercial real estate cycle these things don’t happen overnight.”
Beard said he expects the market will absorb the existing vacancies within 12-24 months. Yet, much depends on the Houston economy.
“It takes a while for companies to ramp back up to do their hiring,” Everson said.