HOUSTON (CoStar-Justin Boyar) – December 23, 2019 – In Houston’s Galleria-Uptown submarket, more than 80% of office net absorption since 2010 occurred in five-star product, the highest classification of building. The area’s four five-star rated buildings were 7% vacant as of last quarter, versus 19% vacancy for the submarket’s 31 four-star buildings.
This signifies potentially pent-up demand for five-star space in the submarket, although developers could face lower rent growth than in other major markets in the near future, owing to the nation’s highest vacancy rate throughout Houston.
This should come as no surprise, as the Galleria-Uptown area, which is located at the crossroads of the River Oaks, Tanglewood and Memorial residential areas, boasts of some of the strongest demographics and highest grossing retail stores in the country. The Neiman Marcus and Saks Fifth Avenue department stores, for example, each rank second in terms of revenue after their flagship stores in Dallas and New York, respectively.
The mentality of office tenants here is that they want to be located in the highest quality space that the submarket can provide while fitting within their budget. And if the Galleria-Uptown submarket becomes too pricey for them, or the highest-end options are too few, they leave.
Air Liquide, for example, decided to relocate to brand-new office space slightly west in MetroNational’s Memorial City development in the Katy Freeway East submarket. And Marathon Oil recently decided to move out of its namesake legacy building at 5555 San Felipe to a new build-to-suit campus at CityCentre in Katy Freeway East.
Today, high-end four-star office space in Houston and in several major U.S. markets faces an existential issue of renovating and adding new amenities to compete with newer space.
Among older generation four-star space in the Galleria-Uptown submarket, Four Oaks Place, owned by Allianz and managed by Transwestern, and Post Oak Central, both owned and managed by CPPIB subsidiary Parkway, have recently undergone major renovations. Four Oaks Place, however, has recently seen some large subleases in former BHP space, occasionally at the expense of Post Oak Central.
Additionally, the Galleria’s main promenade, Post Oak Boulevard, is undergoing a nearly $200 million renovation to add a bus rapid transit line and improve its walkable appeal, which should deliver in phases over the next few years.