The Phaserl


It Starts: First Mega-Foreclosure Hits Houston Office Market

by Wolf Richter, Wolf Street:

A nasty quarter at the epicenter of the Great American Oil Bust.

Greenspoint Place, a 1.5-million-square-foot, six-building office and retail complex on 36 acres, whose occupancy plunged below 40% when Exxon Mobil moved to its new campus, was sold at a foreclosure auction on July 5. It crowned a nasty quarter in Houston’s oil-bust office market.

The complex was owned by a partnership of two giants: one of the world’s largest developers, Hines, and the General Motors Pension Fund. They’d acquired it in the 1990s. In July 2012, they’d refinanced the first mortgage of $145 million with Northwestern Mutual.

Letting the lender deal with the problems was the logical solution. In early June, Hines told the Houston Business Journal in an email:

“Considering the average occupancy rate in this depressed submarket is only about 50%, due largely to the fact the energy market is hurting, ownership of the asset will be turned over to the lender. We believe that is the best course of action for the property at this juncture.”

Hines, with $89 billion of assets under management, could have easily kept the property, losing money as it went. But it chose not to. With its excellent insider knowledge of the market, it decided that this wasn’t a temporary real estate downturn, but that it was hopeless in the longer term and that it was better to bail out now. Let the lender take the losses.

During the foreclosure auction, Northwestern Mutual Life submitted the “highest and best bid” of $77.5 million and ended up with the property, which it will try to market and lease.

But finding tenants will be tough. The entire office market of the North Belt/Greenspoint area, with 11.3 million square feet (msf) of space, got hit hard by Exxon’s departure, which vacated 2 msf at the worst possible time. Commercial real estate services firm Savills Studley just reported that the availability rate in the area hit a catastrophic 51% in Q2, the highest of any area in Houston. In Class A properties, it soared to 66%.

Of the 193 msf of total office space in Greater Houston, 50 msf of space, or 26%, is available. That’s up 5.9% from Q1 and up 21% from a year ago! In Class A buildings, availability rose to 29%.

Following on the heels of North Belt/Greenpoint is the Katy Freeway sub-market where availability jumped to 37% overall, and to 41% in Class A buildings.

Hope? In Q2, there has been a “surprising jump,” as Savills put it, in activity: 2.9 msf were leased, up 75% from the frozen level in Q1. That’s still 18% below long-term trend of 3.3 msf, and “does not yet represent a reversal from the trend.” Over the last four quarters, 8.5 msf were leased, 36% below the 10-year average, and the lowest four-quarter volume on record.

And much of this deal volume is companies vacating one office and moving into another, which doesn’t help the overall market that much.

Plus, it wasn’t oil companies that suddenly decided to take on new space. Of the ten largest deals, nine were by non-energy companies accounting for 96% of the volume on a square-foot basis.

The largest deal: American Bureau of Shipping leased the entire CityPlace 2 tower with 326,800 sf, which will break ground next year. So this doesn’t help the current market either. In fact, the office space it will vacate is in, you guessed it, the Greenspoint area.

The sole energy company among the top ten is Patterson-UTI Drilling. It will move into 34,748 sf at the vacant and immensely desperate Remington Square III Tower, built last year. It will move out of its space in, you guessed it, the Greenspoint area.

Companies are downsizing and trying to shed office space they leased years ago during the boom when they believed the industry hype that there would be an office shortage, but never occupied this space. This hogging of unused office space in itself creates demand and pushes up prices and fosters the illusion of a sustainable office boom – and a shortage. But now this empty space is hitting the sublease market overnight.

And “see-through buildings” – a term coined during the 1980s oil bust for shells of buildings whose floors weren’t built out – are showing up again on the sublease market.

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