post

The Build-Out Process : One Simple Way to Save Time and Money

For years, the process of planning a commercial build-out has been a slow moving and somewhat tedious game of guessing and waiting.

It consists of handing off an idea to one professional who might make a few changes before sending it off to the next one. This typically results in a great deal of time spent and gaps in communication that could have prevented unnecessary work, frustration, and expense.

When your company is preparing for a move or expansion, make the build-out process as efficient as possible by doing one very simple thing.

Get all of your professionals into a room at the same time. With modern technology, this could mean a video conference if an in-person meeting is too difficult to schedule. Have an open discussion with your company VP’s, your real estate professional, architect, contractor, and any other relevant people who may be involved.

Come to an agreement at the start about timing, expectations, and money.

This puts everyone on the same page and gets the ball rolling in the right direction. Rather than only focusing only on their own small piece of the puzzle, the bigger picture is known to all. Honest feedback and discussion can take place to establish workable parameters and, ideally, everyone’s part becomes a little easier.

An added bonus.

Collaboration is a great networking opportunity. It is to your advantage and theirs that they each come to this meeting with their best feet forward. Rather than hiding behind a desk and noting a name on the paperwork, they get to shake hands, talk, expand their knowledge and co-create a great working environment. Win-win.

Looking to move or expand your space? Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

post

The Modern Office

Ethonomics is the study of the delicate balance between ethics and economics.

It has become somewhat of a buzz word in modern office management culture. Why is that important from a
commercial real estate perspective? Because it is literally changing the way offices are designed.

Numbered are the days of cubicles and long hallways of doors to hide behind as we drudge through our 40 hours, counting down to the weekend. Office design is a reflection of our awareness that work-life balance is not just important for employees to be healthy, happy, and productive. It is imperative.

There is a radical transformation happening.

The modern office is a place for interpersonal connection, collaboration, and co-creation. It is no longer necessary for phone calls, accessing computers or files, attending meetings, and pushing paper. In fact, more and more companies are going paperless and most productivity and communication are digital.

Office spaces feature WiFi throughout, gourmet kitchens, and unconventional, creative meeting spaces in open plan settings that feel more like cozy cafes or living rooms than dedicated workspace. Design is taking advantage of technology and integrating the promotion of living healthier lifestyles. Fitness rooms are as common as blended schedules that offer employees the opportunity to work both remotely and on site. Ultimately, staff are more productive and happier and the office provides efficient, as-needed space.

Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.

 

post

Houston Office Market Report: Mid-Year 2018

Houston Office Market Report: Mid-Year 2018
Economic Indicators are Strong and Oil Market Continues Upward Trend.
Houston Office Market Update

As the 2017 calendar year came to a close, I noted the first glimpses of optimism within the Houston business community in a long time. The oil market was beginning to stabilize, and OPEC had recently announced an extension of its output restrictions through the end of 2018. Now, with half of 2018 in the rear-view mirror, we can safely agree on the fact that Houston’s office market has reached bottom. Growth is expected to occur slowly, and most in the commercial real estate industry admit that it may take 18+ months to backfill all the occupancy losses. Sublease space has continued to saturate the office market, especially in Q1 2018. In the 2nd quarter the available sublease space decreased by 700k sf and could mark a turning point. Tenant concessions are still quite strong across the leasing market, and it’s anticipated to remain a tenant-favorable environment through 2019.

The Strength of Oil & Gas

Today oil is trading consistently in the $65-70 per barrel price range, which is considered a comfortable price point for most in the industry. U.S. crude production has set new records on several occasions this year, most recently just a week ago reaching 11 million bpd. The U.S. rig count has consistently risen through H1 2018, and finally eclipsed the 1,000 mark for the first time since April 2015. There is certainly a feeling in the city that the oil market is back, and with it, the Houston economy. Of course this stabilizing market does not guarantee an immediate influx of hiring and job growth. Energy firms are beginning to hire, yet it is clear that new positions will be posted and filled cautiously on an as-needed basis. The trend prior to the most recent oil downturn was for energy firms to sign “large and long” lease agreements, and their hiring tended to follow suit. This time around we are noting a more measured approach to both hiring and leasing decisions.

Houston Office Market Report - By The Numbers

In the second quarter of 2018 the vacancy rate in the Houston office market decreased mildly from 16.7% to 16.5%. This equated to a net increase in occupancy of 202,720 sf for the quarter. With a total office market exceeding 325 million square feet, this rate yields upwards of 53-55 million square feet of vacant space citywide. When considering available space which is still occupied, but will soon be vacant, the rate exceeds 20%, or 65 million square feet. Despite a weak first quarter for Houston’s office market I do believe the bottom has been reached. Leasing activity seems to be trending upward, and there are a number of new start-ups and firms securing equity funding rounds at this time. Time will tell if this upward trend can continue, and if we will see any substantive reductions in the sublease market for H2 2018.

Rental rates decreased slightly in the 2nd quarter but are practically flat for the year. Across all building classes in Houston the average asking rental rate was $27.60 per square foot. Building owners have continued the strategy of providing more generous concession packages in the form of rental abatement, tenant improvement allowances, free parking, and other inducements as a means of avoiding rental rate reductions. We expect this to continue through the remainder of 2018.

The Houston office market now consists of over 326 million square feet of space and totals more than 9,000 properties. Class A buildings account for a staggering 45% of the total office market. Another 42% of the market is considered Class B, with the remaining 13% falling into Class C.

Houston Construction Activity

Commercial office construction activity remains light at this time, with only 2.6 million square feet in the works. Seven properties remain under construction in The Woodlands, accounting for 35% of the UC inventory in Houston. Overall, this construction space is 52% pre-leased at this time. Over half the properties currently underway will not deliver to the market until 2019. The construction activity for 2017 lagged behind the historical average of ~ 5 million square feet and 2018 will fall short of this number as well. As the market fundamentals begin to re-balance we expect to see an uptick in construction starts. The recent announcement by Hines that they will develop a new 47-story building on the former site of the Houston Chronicle is the first sign of this.

Best and Worst Performers

In the first half of 2018 three submarkets stood out for improved performance: Galleria/Uptown, The Woodlands, and the Katy/Grand Parkway area. Together these three submarkets accounted for over 700k sf of positive absorption. Overall, the South Main/Medical Center remains the strongest office submarket with a 4.1% vacancy rate, under-scoring the healthy performance of Houston’s medical industries. The Woodlands remains the strongest of the large markets at 9.1% vacant – well below the average. Sugar Land is a close second at 9.8% vacancy, and the FM1960/249 area is doing well at 10.4%, reflecting the fact that many Class B and C properties are managing to remain well-occupied.

On the other end of the spectrum we have Greenspoint/N Beltway, Houston CBD, the West Beltway, and Westchase submarkets rounding out the worst performers. Together these four submarkets accounted for over 1.3 million square feet of vacancy increases. Another 1 million square feet of vacancy was lost across 19 other submarkets in Q2 2018. Greenspoint/N Beltway is now 47% vacant, followed by Post Oak Park at 27%.

Summary

IAs you’ve read in this Houston Office Market Report, the local economy has been improving of late, due in large part to the oil & gas market rebounding. There are some economic headwinds on the horizon globally and nationally for the United States which could affect demand for the oil & gas market. Most predictions are considering a 24-36 month time period for that slowdown to materialize. The flattening yield curve, tumultuous stock market, rising interest rates, and the threat of inflation are certainly on investors minds. Here in Houston locally, there is renewed optimism about the coming recovery for our economy. With that recovery will come stabilization of the office market, though we expect this to be a long, drawn out climb back to reasonable occupancy levels.

Click here to view the full Oxford Partners Q2 2018 report.

post

Add On Factor: Why Office Tenants Pay for Space They Don’t Use

Add On Factor: Why Office Tenants Pay for Space They Don't Use

Rentable and Usable Office Space

When leasing office space in a multi tenant office building it is important to understand the difference between rentable and usable square feet.  Some office tenants are not familiar with these terms.  Tenants unfamiliar with the concept of an add-on factor may be confused about how much space they truly need. Essentially as an office tenant you are paying rent based on the “rentable” size of your space. The rentable square footage is not the actual size of your office space.  Let me tell you a story about just how unbalanced that difference can become…

Energy Corridor Case Study

Recently I worked with a client in the Energy Corridor in Houston looking for new office space. He expressed strong interest in a property which had recently converted from a single tenant corporate use to a multi-tenant layout. This means the property was designed originally for one company – think of an office campus setup. Since the conversion was not yet complete the floor plates and common areas were under construction and not fully determined. During construction the new ownership would be making decisions about which common area corridors, restrooms, lobbies and other common area elements would remain. As a result the leasing agent was unable to provide the true add on factor at the time we toured the property.

What Is An Add-On Factor?

As a quick refresher, the add on factor (sometimes referred to as core factor) is the amount of a commercial building taken up by common areas such as hallways, restrooms, elevators, the lobby, etc. The add on factor will typically fall between 15-20%. This means the usable square footage of a company’s office space will be inflated by 15-20% to account for the common area space in the office building. In this way each tenant pays for their share of the common areas they may use throughout the building.

Back To Our Story

After touring the property with my client we began discussions with the leasing broker. Upon receiving an initial proposal we discovered an add on factor in excess of 60%! Understandably this was not an acceptable calculation for my client. Imagine leasing an office space consisting of 3,000 actual square feet, but paying rental expense on 4,800sf – out of the question. After much discussion and negotiation we were able to reduce the add on factor to 37%, but ultimately this was not enough to make a deal.

It is not uncommon to find re-purposed office buildings with a high percentage of common areas. With the headwinds facing retail developments and malls we may see this trend continue to grow. Typically landlords will opt to use a “market factor” which is artificially lowered to compete with other properties in the area. In this situation the landlord was attempting to secure lease agreements with an add on factor 3 times the market rate. I advised my client throughout this interaction and we decided to pursue alternative options in the area.

Relocation to Multi Tenant Office Space

One important thing to mention is that most types of commercial real estate do not use an add on factor. This type of calculation is typically exclusive to multi-tenant office buildings. This means if you are a tenant in an industrial, flex office, retail or single-tenant office building you are not paying for an add-on factor. Tenants in these types of properties have a rentable and usable square footage which are identical. This can lead to some confusion for tenants looking at relocation to a multi-tenant building. These tenants may expect that the 5,000sf they currently occupy will be the same 5,000sf they need upon relocation. But again, this is 5,000sf usable, and with the add-on factor included they will require at least 5,750sf – and possibly more.

At Oxford Partners we will frequently begin the process of working with a new client by preparing a minimum space analysis. This allows the client to visualize all the necessary space elements for their office, and understand how much space will be required. Part of this assessment is an estimation for add-on factor. You can access our free Space Planning Tool here. Contact us directly for more information about the minimum space analysis if you’re interested in learning more.

Conclusion

Companies leasing space in a multi-tenant office building must always be aware of the add on factor used in their building. At some point a tenant will want to relocate, and it is key to know the exact usable space required for their operations. It is also important to ensure the rentable square footage for your lease agreement is calculated correctly. There should be a clearly identified common area markup listed in the lease. When considering a relocation verify these numbers ahead of time to ensure a market factor is being used. This will help avoid paying for space you don’t use and likely will never see.