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A Boom in Houston Is Led by the Energy Industry

Posted by: In: Rockspring News 04 Dec 2012 Comments: 0

(The New York Times)  HOUSTON — Even first-time visitors here can tell that the city is growing rapidly. Construction cranes overhang office and apartment sites all along the Katy Freeway, a stretch of Interstate 10 that connects a string of booming submarkets west of the 610 Loop. This expanse includes the Westchase neighborhood and the Energy Corridor, home to an expanding cluster of energy companies.

The energy sector drives job growth and all manner of business activity here, with the greatest demand for office space concentrated in the west side where oil and gas companies are clustered, in the medical center just south of the central business district and in the Woodlands, a master-planned community 27 miles north of downtown.

“Houston is clearly a growth leader,” said Walter Page, director of office research at Property and Portfolio Research in Boston. “It was the first major economy in the U.S. to register more jobs than it lost in the recession.” Employment here is up 3.7 percent since August 2008, when it peaked before declining during the recession. That compares with New York’s gain of just 0.7 percent from its peak in April 2008 before declining, Mr. Page said.

The city’s office vacancy rate was 11.9 percent in the third quarter, down from 13.4 percent a year earlier, according to the CoStar Group, a real estate research firm in Washington. Developers are creating new space to meet that strong demand, completing 15 major office buildings in the first three quarters of this year alone. Of the 3.9 million square feet of office space under construction, more than 90 percent is in the western submarkets or in the Woodlands, Mr. Page said.

The energy sector accounts for 3.4 percent of the city’s employment, more than five times the national average of 0.6 percent, Mr. Page said. Despite that heavy concentration, the rest of the city’s economy is diverse and helps spread the wealth that energy brings into the community to other sectors.

Brisk commercial real estate sales reflect investor interest in the market. This year, an affiliate of the Houston-based Enterprise Products Company bought the Shell Plaza, a 1.8 million-square-foot office complex in the central business district, for $550 million, CoStar reported. The seller was a fund operated by Hines, a Houston-based developer that built the property in the 1970s. Last year, Shell renewed its leases for nearly 1.3 million square feet at Shell Plaza.

Hines developed much of the city’s commercial real estate. Today the company’s projects here include multifamily construction in the shadow of office buildings that it developed in the Galleria, a group of office towers, hotels and retail on the southwestern rim of Loop 610, with a skyline that rivals downtown’s.

Mark Cover, Hines’s chief executive for the southwest region, said that energy, the medical center and the Port of Houston are the three largest engines driving the economy here. “The global energy industry is headquartered here,” he said. “It’s not just oil and gas, it’s alternatives, too. Intellectual capital in the energy field is heavily concentrated here.”

In the only major city in the United States without zoning laws, developers can, in theory, build virtually anything, anywhere in the city. In practice, however, understanding and catering to local industries is a critical element in site selection, Mr. Cover says. “When you really get down to it, the city is market-zoned, because land prices are not based on zoning rights, they’re based on purely capitalistic, highest and best use value,” he said. “If you build the wrong product or build in the wrong place, the market is going to severely punish you.”

Market forces shape the city’s development in hubs, says Jim Knight, who heads land development in Texas for Bury & Partners, an Austin-based engineering firm.

Refineries and distribution centers cluster near the port, while energy companies and other major employers tend to establish a presence, either downtown or in a submarket, and stick to that area indefinitely.

Employees generally move close to work rather than make long commutes in the city’s heavy traffic, so apartments and single-family housing grow around major employers, eventually attracting retailers to service those populations.

Exxon Mobil is defying that pattern by building its new campus here on 385 acres near the Woodlands. Beginning in 2014, the company will bring about 10,000 jobs there, chiefly relocating from several million square feet in north Houston and downtown. Also moving to the new campus will be business units from Fairfax, Va.; Akron, Ohio; and a refinery southeast of the city, in an effort to increase collaboration and innovation.

“In my lifetime, Exxon Mobil is the first company of that size in any major city of Texas to relocate far enough away that it potentially would affect the drive times of its employees,” Mr. Knight said.

Indeed, the migration of businesses and residents to the Woodlands in recent years has surprised many longtime city residents. Opened in 1974, the community is home to more than 100,000 residents and 1,755 businesses, according to the Howard Hughes Corporation, which acquired the 28,000-acre project in 2011.

“It’s all about quality of life,” said Paul Layne, Howard Hughes’s executive vice president for master-planned communities. “People can live here, have their offices here and play here.” Woodlands Town Center is oriented to pedestrian traffic, with large plazas and sidewalk restaurants, night life and entertainment venues, and connections to a network of hiking and bike trails.

New office projects range in size from the 23,000-square-foot Woodlands Gateway, under development by Jorge Molina Hill, to a 31-story, 550,000-square-foot office tower that Anadarko Petroleum Corporation is building next to its headquarters in the Woodlands Town Center.

The Woodlands Development Company, a subsidiary of Howard Hughes, is building the speculative office building 3 Waterway Square across the street from Anadarko, and the developer has also broken ground on a 197,000-square-foot, speculative office building in a new mixed-use project in the Woodlands called Hughes Landing on Lake Woodlands.

“The Woodlands is really an island that doesn’t necessarily compete with the other marketplaces,” said Scott Martin, executive managing director at Granite Properties. The Houston developer has several local projects in the works, including one near the Woodlands. “People either want to be there or they don’t; it’s not much of a commuter market.”

Mitsuhiko Tatsuno, an investor whose family-owned company has owned five office buildings in the Woodlands since 1990, says occupancy in the properties has increased to nearly 100 percent, from about 60 percent in 2010.

“Of the whole U.S. market, Texas and Houston are very good,” said Mr. Tatsuno, who is head of corporate planning at Tatsuno Corporation in Osaka, Japan. “And in Houston, the Woodlands is one of the best markets.”

Harold Holliday, an executive vice president in the debt and equity finance group at CB Richard Ellis, said he could not remember a better time here for arranging commercial real estate financing.

“We are very fortunate to be plying our craft in this city,” said Mr. Holliday. “We are seen as a city where you can get paid for taking risk, and in a lot of the gateway markets, you can’t.”

To view The New York Times article, click here.

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