By Mike Sheridan
Houston Correspondent
Article courtesy of National Real Estate Investor.

A few years ago, the nation's fourth-largest metropolis was known as Space City ž not because it was home to NASA, but because the capital of cowboy capitalism had too many empty buildings chasing too few tenants.

Now, thanks to an expanding Houston economy, increased corporate relocations and a tightening of the real estate market, Houston is the subject of derision no more.

"Houston added more than 47,000 jobs last year, a 2.8% gain over 1993," says Martin Debrovner, president of Houston-based Weingarten Realty Investors, one of the nation's premier real estate investment trusts. "Houston ranked 10th-highest among the 26 U.S. metro areas with more than 1.5 million people in 12-month total job gain and 14th in percentage gain. That is providing an impetus to the economy and the real estate industry."

Houston was the third leading city for corporate relocations last year, according to Expansion Management Magazine, Jeanette Rice, senior vice president of Holliday Fenoglio Dockerty & Gibson, Inc., points out, adding that "long term, Cognetics Inc. projects Houston to have the seventh greatest gain among U.S. metros in primary office employment from 1993 through 2003."

Jim C. Kollaer, president and chief executive officer of the Greater Houston partnership, notes that both non-residential and residential building permits posted advances in January, boosting the total value of permits 20% above the January 1994 level. "The employment data suggest the resumption of robust expansion for Houston's economy," he adds.

Accordingly, the energy capital of the world's retail, multifamily, industrial and suburban office markets are all reporting significant activity; the one laggard is the central business district, which is reporting increased vacancies due to an overabundance of sublease space.

"Houston's commercial market had a very good year in 1994, but we're off to a slow start in the first quarter of this year, primarily in the downtown area," says Jeff Black, first vice president in the Galleria office of CB Commercial. "Still, the fundamentals are there, and we're optimistic for the rest of the year."

One of the reasons for this optimism is rates. According to Trione & GordonOncor International, the blended citywide asking rental rates increased for the first time in six quarters, rising $0.08 to $11.55 per sq. ft. from the previous 90 days. Blended suburban rental rates increased during the first quarter from $11.07 to $11.18.

Accordingly, Class-A office space in Houston is tight, with an occupancy rate of some 90%, says Walter M. Ross, chairman of Houston-based PM Realty Group. "Houston absorbed 2.8 million sq. ft. of space in 1994, the highest in four years. There is renewed leasing interest, and buildings like 1415 Louisiana are well positioned to pick up occupancy as the market grows stronger."

Currently, one of the major projects downtown is HL&P's Houston Industries Plaza, formerly known as 1100 Milam, which is undergoing renovations and is expected to be completed next year. Tenneco Gas expanded its space at 1100 Louisiana by 189,810 sq. ft. while UNOCAL announced plans to move 250 additional employees to Sugar Land, where the energy concern plans to lease and build out 60,000 sq. ft. of additional space in One Sugar Creek Place.

CB Commercial reports that overall, the office vacancy rate for Houston was 20.14%, with the southwest area of the city reporting the highest rate, 27.7%, while the northeast is at 14.3%.

Wayne Starr, president of Starr Realty Inc., is building a 51,000 sq. ft. structure on 4.2 acres of land at 12221 North Houston Rosslyn Road. Starr says that increasing suburban rental rates will reach "new development" rates within a short period of time, "allowing the suburban market to respond to new growth demand from small and average-sized tenants while major corporations are rightsizing and downsizing."

At the same time, building sales are on the rise, according to an analysis by Trione & Gordon. The first quarter of this year saw at least eight office building sales while the sale of two office buildings closed at the end of 1994.

"There are a lot of good things going on right now," notes James E. Peters, managing director of the Houston branch of Cushman & Wakefield. "We expect to see continued growth in Houston and continued strength in the real estate market."

Multifamily exceptionally strong

The multifamily sector of the real estate market is also exceptionally strong. According to statistics compiled by the research department of Camden Property Trust, a multifamily REIT based in Houston, 2,410 multifamily units were completed last year with nearly double that amount ž 5,532 units ž currently under construction. One such project, completed last December, is Woodland Park, a 288-unit complex that was developed for approximately $12.5 million.

Ric Campo, president and CEO of Camden, adds that while proposed multifamily constr uction in 1996 will decline to about 1,161 and increase slightly to 1,277 for 1997, demand remains robust.

"We're not saying the multifamily sector is booming like the old days, but it's going strong," explains Campo. "This is particularly true as more new jobs are created in Houston."

Multifamily projects now under construction include those by Gables Residential, Dinerstein/Murphy, Duddleston Development Corp., Property Trust, Sueba and Camden Property Trust. The largest is the 600-unit Property Trust development at Fannin.

Owners of the historical Hogg Building at 401 Louisiana said they plan to convert six floors into loft apartments, while the old First City Main building is being considered for conversion to residential.

A venture between The Rockefeller Foundation and Amli Residential Properties closed in April on the purchase of the former Park at Greenwood Forest Apartments, a recently completed 316-unit garden apartment community at Greenwood Forest Drive and FM 1960.

Last year, the city absorbed some 7,300 apartment units, more than double the absorption rate of the previous year. According to O'Conner & Associates, Houston's multifamily units are 91% occupied, a figure expected to remain the same into 1996.

Retail reports activity

Since retail follows rooftops, it isn't surprising that the retail sector is also reporting activity. Houston is expected to report a 7% increase in retail sales this year, following a 5.6% increase in 1994.

One of the most eagerly awaited projects in Houston is the 190,000 sq. ft. The Centre at Post Oak on the site of the former Sakowitz Department Store site at the northwest corner of Westheimer and Post Oak Boulevard ž directly across from the Galleria. When completed later this year, the center will represent one of Weingarten Realty Investors' flagship developments, with a diverse mix of retailers including Barnes & Noble, Marshall's and CompUSA.

WRI also began construction of the second phase of The Village Arcade, which will more than double the size of the famous shopping area with stores such as Eddie Bauer and The Limited Group soon joining The Gap in anchoring the 191,000 sq. ft. of retail space.

Last fall, Homart opened its 1 million sq. ft. The Woodlands Mall 27 miles north of downtown Houston, with Dillard's, Foley's, Sears and Mervyn's as anchors.

Analysts say newer chains such as Baby Superstore, J.J. Designs and Old Navy are expected to move into the Houston market and create new retail leasing activity.

"Anchored centers continue to outperform unanchored, although the largest rise in occupancy in the past few years has occurred in unanchored centers," says Rice of Holliday Fenoglio, adding that the outlook for this year is for absorption to remain healthy in the 2.5 million to 3.5 million sq. ft. range. "Houston's economy and continued suburbanization will create new demand."

In March, Holliday Fenoglio arranged the $19.4 million sale and financing of a portfolio consisting of three retail centers in the Houston area. All three centers are anchored by Randall's Food Markets.

Industrial absorption strong

On the industrial side, CB Commercial reports the Houston area's 240 million sq. ft. of industrial space was 11.44% vacant during the first quarter of this year ž down a full percentage point from the earlier quarter. The highest vacancy was in the southeast sector, while the lowest was in the northwest. Industrial buildings under construction total 1 million sq. ft. and include Goodman Manufacturing's 234,000 sq. ft. on West 12th Street and Baker Hughes' 200,000 sq. ft. structure at Rankin and Aldine Westfield.

"The overall vacancy rate for institutional-grade industrial properties in Houston exceeds 90% with the Northwest submarket experiencing an occupancy in excess of 94%," explains Paul C. Congleton, vice president of Security Capital Industrial Trust. "Absorption in Houston has been strong over the last 24 months, largely influenced by the requirement of Compaq that all its vendors be located in Houston for JIT purposes.

Security Capital, which owns and operates 3.4 million sq. ft. of bulk distribution and light industrial space in Houston, has two new buildings currently under construction totaling 188,800 sq. ft. of bulk distribution space, he adds, which were 26% preleased prior to breaking ground.

In light of the industrial space situation, Matthew S. Khourie, president and CEO of Trammell Crow Houston Inc., says he expects the market to post rental growth of 5% to 10% and continued occupancy growth, especially for bulk product this year. "Bulk space is especially tight in the northwest submarket, making it the best landlord's market that we have seen in years," says Khourie. "Rental rates should continue to be forced up as choices for larger spaces become few and far between."

Mike Sheridan is a Houston-based freelance writer who contributes regularly to a number of national magazines.