"When we took over leasing of the building almost a year ago, the rates were at $18 per sf net," says Brad Fricks, vice president of Dallas-based Stream Realty Partners LP's Houston office. "Most of the leases we've made in the past year are $24 per sf and higher." Underwriting the uptick is the 99% occupancy in the 1400 McKinney St. high rise.
According to Jim Arket senior vice president with Grubb & Ellis Co.'s Houston office, rising demand and a scarcity of large blocks of space are spiking rents into record-breaking territory. In a second-quarter report, Grubb & Ellis researchers found class A space's vacancy is just 8.7%. The average gross rate is $30.60 per sf, up 37.2% from the same time a year ago.
Transwestern's midyear report puts the CBD inventory of 29.2 million sf at 5.9%, which factors out to 1.7 million sf of open space. Its researchers say the class A rate is averaging $26.69 per sf.
Fricks says tightening vacancy is a contributing factor. In addition, the newer breed of office owners wanting higher investment yields and rising construction costs will continue to drive rents upward. "With construction costs so high, the current rental rates can't support the newer buildings," he says. "We'll have to see much higher rental rates for those buildings to get built. And tenants need the space."
David Lee, senior vice president for Houston-based Transwestern, not only agrees, but points out replacement costs for new product will need to have nearly $40-per-sf gross quotes to justify costs. It's a matter of economics. "When in a condition of limited supply, rates will increase closer and closer to the cost of the new replacement product," Lee says. "This is something we've seen before."
Lee points out that when newer product comes on line, older buildings will work to catch up by making rates competitive. But with new buildings still 18 months to two years from completion in the CBD, current owners have an interesting advantage, he adds. "The guys that got their stuff in the ground a year and a half to two years ago and before are in great shape now," he says. "In a two-year period, rates have essentially doubled Downtown."
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