Companies hiring and expanding amid high crude prices, exploration boom
(HOUSTON) In most cities, companies are holding tight, mothballing office expansions and delaying new hires. But not in Houston.
|Land of big deals: After bottoming at an average of US$58 a square foot in 2009, sales prices for office buildings in Houston climbed to an average US$224 a square foot last year, the highest in the last 10 years, according to Real Capital Analytics|
Powered by a rise in oil prices and a shale exploration boom, Houston is the first major metropolitan region to regain all the jobs it lost in the recession.
The region added about 76,000 jobs last year, according to the Bureau of Labor Statistics and is on pace to pick up tens of thousands more this year.
Oil and gas companies here, from the biggest names like ExxonMobil to the smallest independents, are dusting off plans to expand, relocate or put up new buildings.
Last year, 1.8 million square feet of commercial space was vacuumed up, the biggest increase since 2007 and real estate brokers expect the same or greater this year.
‘No question, it’s energy,’ said Jim Arket, a senior vice-president at Grubb & Ellis here. ‘That’s been the plus multiplier of Houston.’
The resurgence can be partly tied to a specific event: the lifting in autumn 2010 of the government moratorium on deepwater drilling in the Gulf of Mexico after the BP oil spill that April.
The bulk of the gulf’s drilling and profits comes from those offshore waters and oil executives felt confident enough to move ahead with expansion plans. The boom in shale drilling has also bolstered balance sheets.
Nexen, a Canadian energy company, is moving its US headquarters from Plano, Texas, to here after it received permits to restart deepwater drilling in the gulf. Deepwater operations there will account for 40 per cent of the company’s exploration budget this year.
‘Houston is quite clearly the place to be for a deepwater operator,’ said Grant Dreger, the vice-president for finance and administration at Nexen Petroleum USA. ‘You have loads of deepwater talent and it’s home to the majority of our joint venture partners. It’s the primary centre for our deal flow.’
The office sales market, often a harbinger of future conditions, has picked up. After bottoming at an average of US$58 a square foot in 2009, sales prices for office buildings climbed to an average US$224 a square foot last year, the highest in the last 10 years, according to Real Capital Analytics, a national research and consulting firm.
That is still low compared with Manhattan, where sales prices average US$470 a square foot, and Washington, at US$476 a square foot.
A Canadian real estate investment trust made local history in December when it purchased the Hess Tower in downtown Houston for US$442.5 million, or US$524 per square foot – the highest amount ever paid for a Houston office building. The last record had been set during the building boom four years before.
The 29-storey tower, which was just completed in June and had been leased to the Hess Corp through 2026, was among the top 15 sales in the country last year, according to Real Capital Analytics.
‘It matches up perfectly with what we’re doing,’ said Thomas J Hofstedter, the chief executive of H&R Reit, the Toronto company that bought the Hess Tower to add to its portfolio of 42 million square feet. ‘Our focus isn’t energy, it’s high quality tenants and long-term credit leases.’
Speculative construction has perked up, too, with more than one million square feet under way at the close of the year. There was little new construction for the last few years because of an abundance of space.
After delaying the project for a year, the huge Swedish construction firm Skanska broke ground in December on a 302,000 square foot office tower, without a signed tenant. The 20-storey tower, now scheduled to open in mid-2013, will cost US$60 million to US$90 million.
‘We hope to build on the momentum here,’ said Michael Mair, an executive vice-president and regional manager at Skanska in Houston. ‘The timing is right and we think we can deliver.’
Skanska, which also bought a downtown office building and a suburban office campus last year, can afford to gamble because of its deep pockets. In four cities with strong leasing markets, according to Skanska, the company is investing at least US$279 million in putting up office buildings without a tenant.
‘Clearly, the story about the attraction to Texas is job growth,’ Mr Mair said. ‘Everyone is looking at Texas for opportunities, quality of life and affordability, and Houston is off the charts for every one of those items.’
With little construction and large blocks of space disappearing from the market, the overall vacancy rate fell to 14.8 per cent in the fourth quarter from 15.1 per cent during the same period in 2010.
When Shell renewed its leases downtown for nearly 1.3 million square feet, they became the biggest leases signed nationwide last year. BP added 305,000 square feet of space to accommodate employees relocating to Houston from outside Texas, among other things.
Small independents are also moving apace. Noble Energy, the first company to get a deepwater drilling permit in the gulf since the spill, is consolidating three offices into one 400,000 sq ft location. The new office’s extra 100,000 sq ft of space will accommodate future growth.
Still, Houston’s office market has not entirely regained its pre-recession levels. The average asking rent has barely budged from the end of 2008, at US$24.33 a square foot in the fourth quarter, according to Reis Inc.
The vacancy rate at the end of the fourth quarter remained higher than the 12.7 per cent in the same period in 2008. Mr Arket, of Grubb & Ellis, said the commercial real estate market usually trailed the overall market by six to 12 months and that the vacancy rate would fall further, barring another downturn.
Energy companies are also being drawn north of Houston to The Woodlands, a 28,000-acre master-planned development with office, retail, medical and residential space that has been a draw for middle and high-income residents since its inception some 40 years ago.
Over the last year, oil and gas companies, like the Newfield Exploration Co and Talisman Energy, have expanded offices in the development or relocated there to be closer to their employees.
But the blockbuster deal for the area came from Exxon Mobil, the world’s biggest publicly traded oil company, which announced it would erect a new campus on 385 acres abutting The Woodlands for the bulk of its local employees. The move will consolidate most of its workers in one spot when the campus is finished in 2015.
Exxon Mobil would not disclose the campus’ price tag or square footage, but real estate brokers estimate the company would need to build at least four million square feet to accommodate 8,000 employees.
The land for Exxon Mobil’s campus was purchased from a local real estate development company, CDC Houston, a subsidiary of the Coventry Development Corp, which began construction on its own neighbouring residential development shortly thereafter.
The development, Springwoods Village, is set on 1,800 acres and is expected to have more than eight million square feet of commercial space, 1.5 million square feet of retail and hotel space and 5,000 residences.
‘Obviously, Exxon’s selection of the land really validates the location,’ said Keith Simon, a senior vice president and the director of development at CDC Houston. — NYT
Source: Business Times 9 Feb 2012