Why do developers keep building new office space in Houston?
I just read an article from Bloomberg saying Houston's office vacancy rate is 24%. But yet, the article states about 3.1 million square feet of new office space is being completed in the next 18 months. Are developers just hoping their building is attractive enough for new tenants in a bad oil market?
Some of the new office spaces:
Skanska: https://www.usa.skanska.com/who-we-are/media/pres…
Most of those building will have significant portions pre-leased before construction even starts.
for example Texas tower, Hines is leasing a bunch of space for their own headquarters in it.
dev fees bro
...
but fr I have no idea.
All speculation, but...
1) per an article I read this morning, 85% of all leases in the previous few years were in buildings built after 2011. So in a case such as this, you may split up the buildings by age, and dig deeper to see vacancy by age, which may allow you to make the argument that a new building should stabilize because the buildings built since 2011 may actually be 90-95% occupied (I don’t know what the actual statistic is, but this is more example purposes).
2) Due to the current conditions in the market, developers are underwriting to stabilize at the current level of market vacancy. I haven’t been in this market in a while, so I don’t know if people are doing this. I imagine it’s unlikely, but possible.
3) Long term capital who say: “even if it takes a 7 years to stabilize, our yield on cost will be high enough to justify the risk and create large profit potential.
4) Developer fees!!!!
There are a plethora reasons why people are building. And keep in mind just because firms are doing it doesn’t mean it’s smart. We will only know who’s walks away with profit in 5-10 years.
Thank you, great points
Once you have shovels in the ground it rarely makes sense to stop. They'd rather have the ability to buy a deal in the market than pay for the lender to complete the project. Don't forget completion guaranties are a thing.
Gotta churn deals. Syndicate out all the equity and use the fees to pay overhead. Better to do a deal in which you don't hit your promotes, but get the fees and keep the lights on, rather than lay off decades of accumulated experience which you'll just have to rehire when the market turns back around
Because those new buildings are getting leased. Leaves a higher overall market vacancy but those new buildings are doing just fine.
The vacancy is not in the brand new buildings. It probably is a soft market for pushing rents though.
Something I learned (painfully) very early in my career - never underestimate Houston's ability to keep building long after it stopped making sense. You could buy stabilized multi for less than the basis of a new development and people kept building. Build/offer a ton of concessions to lease-up/struggle to season rent roll/sell it for maybe a little more than what you built it for/repeat???? I sort of understand it from the developer's perspective but I never understood why these HNW investors kept coming back to the well.
Is working in the Houston market a good place to start for real estate acquisition and development as an intern or analyst? If you can lease up an older building in Houston, does that translate to other markets in the US?
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