Spotlight on Houston’s Office Boom

A surge in U.S. oil and gas production has ensured strong ongoing demand for office space in the industry’s traditional heartland, Houston.

Thor Equities founder and chief executive Joe Sitt made a bet on the market several years ago, a bet which is paying off handsomely.

At a recent real estate private equity conference in New York, Sitt said that about eight years ago, the firm decided to invest inmarkets that  “would have disproportionate exposure to energy,” as well as those focused on technology and select emerging markets. All three of these areas had been outperformers for the firm.

“Houston is an incredible market for us. We’re very, very bullish, and have been bullish on Houston for about seven years now,” he said.

“Two years ago, I spoke about fracking, and everyone looked at me like I had four eyes…and I talked about how fracking, combined with technology, was going to diametrically change the macroeconomic dimensions for countries like the United States.

“We originally pursued Houston because of traditional oil and oil market and oil-based companies etc. … What nobody realized was that the fracking industry, the technology, the infrastructure that’s required, even though the gas or the oil reserve they are tapping may not be there, all of the companies that have the knowledge are there. They just expanded into the fracking and infrastructure side of the business.

“So fracking has not just not hurt the Houston market and the traditional energy market headquarters. It’s helped it.”

The increasing demand from energy tenants has spurred rapid growth in Houston’s construction market. While construction remains muted in many U.S. cities, there was 17.3 million square feet of office space under construction in Houston during the third quarter, according to real estate advisory group CBRE.

Tenants and landlords should not expect the new supply of office space to curb rent growth for high-quality properties, however.

“With a heavily pre-leased pipeline and single-digit Class A vacancy, rents continue to trend upward, recording 7 percent annual growth in average gross asking rents on a preliminary basis,” Sara Rutledge, CBRE director of research and analysis, said in a statement.

Preliminary figures from real estate firm CBRE showed the Houston office vacancy rate dipped slightly during the third quarter, from 12 to 11.9 percent, while gross asking rents gained 0.7 percent to $26.10 per square foot.

In downtown Houston, the market was stronger, with vacancy falling from 9.2 to 8.7 percent and gross asking rents climbing 2 per cent to $39.08 per square foot.