Energy Spurs a Recovery in Houston

02 08, 2012 by The New York Times

In most cities, companies are holding tight, mothballing office expansions and delaying new hires. But not in Houston.

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 Texas Workforce Commission, and is on pace to pick up tens of thousands more this year.

Oil and gas companies, from the biggest names like Exxon Mobil 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, 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 in Houston. “That’s been the plus multiplier of Houston.”

The resurgence can be partly tied to the lifting in fall 2010 of the government moratorium on deepwater drilling in the Gulf of Mexico after the BP oil spill. The bulk of the gulf’s drilling and profits comes from those offshore waters. Shale drilling has also bolstered balance sheets.

Nexen, a Canadian company, is moving its American headquarters from Plano, Tex., to Houston after it received permits to restart deepwater drilling in the gulf. “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 U.S.A. “You have loads of deepwater talent, and it’s home to the majority of our joint venture partners.”

The office sales market, often a harbinger of future conditions, has picked up. After bottoming at an average $58 a square foot in 2009, sales prices for office buildings climbed to an average $224 a square foot last year, the highest in the last 10 years, according to Real Capital Analytics, a research and consulting firm. That is still low compared with Manhattan, where sales prices average $470 a square foot, and Washington, at $476 a square foot.

A Canadian real estate investment trust made local history in December when it purchased the Hess Tower downtown for $442.5 million, or $524 per square foot — the highest amount ever paid for a Houston office building. The 29-story tower, which was completed in June and had been leased to the Hess Corporation 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, chief executive of H&R REIT, the Toronto company that bought the Hess Tower. “Our focus isn’t energy; it’s high-quality tenants and long-term credit leases.”

Speculative construction has perked up, too, with more than a million square feet under way at year-end. There was little new construction for the last few years because of abundant space.

After a year’s delay, the Swedish construction giant Skanska broke ground in December on a 302,000-square-foot office tower, without a signed tenant. The 20-story tower, now scheduled to open in mid-2013, will cost $60 million to $90 million.

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, Skanska said, it is investing at least $279 million in putting up office buildings without a tenant.

“Clearly, the story about the attraction to Texas is job growth,” said Michael Mair, an executive vice president and regional manager at Skanska in Houston. “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, overall vacancy fell to 14.8 percent in the fourth quarter from 15.1 percent during the same period in 2010, according to Reis Inc. (Gains in the Class A market were affected by companies’ giving back Class B and C space and expanding.) Shell’s renewal of its lease for nearly 1.3 million square feet downtown was the biggest lease signed nationwide last year. BP added 305,000 square feet 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 with 400,000 square feet. An extra 100,000 square feet will accommodate future growth.

Still, Houston’s office market has not entirely regained its prerecession levels. At $24.33 a square foot in the fourth quarter, average asking rent has barely budged from the end of 2008, according to Reis. Vacancy at the end of the fourth quarter was higher than the 12.7 percent in the same period in 2008. Mr. Arket said the commercial real estate market usually trailed the overall market by six to 12 months and that vacancy would fall further, barring another downturn.

Energy companies are also being drawn north of Houston to The Woodlands, a 28,000-acre development with office, retail, medical and residential space. Over the last year, companies like Newfield Exploration and Talisman Energy have expanded offices or relocated there to be closer to employees.

But the blockbuster deal came from Exxon Mobil, which began erecting a campus on 385 acres abutting The Woodlands for the bulk of its local employees. The move will consolidate 8,000 workers in one spot when the estimated four million-square-foot campus is finished in 2015.

The land was purchased from CDC Houston, a subsidiary of the Coventry Development Corporation, which began construction on its own neighboring development, Springwoods Village, shortly thereafter. The 1,800-acre development 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 director of development at CDC Houston.