February 11, 2020
In late 2014, “low oil” prompted an economic dip in Houston, complete with job losses and pullbacks from office and industrial tenants. By late 2019, however, things were looking much, much better.
In early 2020, Connect Houston’s “Capital Markets” panel, moderated by Transwestern’s Steve Pumper, featured representatives from investment and ownership (Jeff Rader with Pacific Oak Capital Advisors and Osama Ahmed with Brookfield Asset Management) and finance (Bob Henning, Northwestern Mutual). All three indicated that 2019 was a good year among their respective assets and deals, and that 2020 would continue that trend.
“For us, the three important pillars of investment are GDP growth, employment growth and low unemployment,” Rader pointed out. “Houston fits two of those pillars, and is a focus market for us.” He added that the two Houston properties Pacific Oak Capital owns — 1800 W. Loop S. and West Loop I & II — are experiencing very strong leasing velocity.
Meanwhile, further east, in downtown Houston, Brookfield is in the process of upgrading Houston Center, which it acquired in early 2018. Additionally, Brookfield is busy upgrading Allen Center, also in the CBD, which it had acquired in 2016. Ahmed noted that his company had acquired Allen Center at $200 per square foot and anticipates stabilization at $300 per square foot. Texas Tower, in the meantime, which is being developed by Hines and Ivanhoé Cambridge, is being built at between $550-$600 per square foot. As such, Brookfield’s strategy is to find buildings with fundamental assets, “with good bones, and to compete with new construction at 50% of basis,” Ahmed said. “Right now, we have enough scale (in downtown Houston) to really create a sense of place, or placemaking.” That includes office on top, and amenities and retails at street level.
As for Northwestern Mutual, “2019 was one of our best years in Houston,” Henning observed. “Over the past five years, we’ve done almost $200 million here.” Northwestern Mutual also closed its first industrial Houston equity deal with National Holdings, he added.
Another topic the panelists discussed involved co-working space. The general consensus was that, even with WeWork’s troubles, the sector, itself, filled a hole of “tenants who needed flexibility and can’t commit to a 10-to-15-year lease because it’s difficult to plan ahead,” Ahmed said. “From that perspective, co-working is here to stay.” The others agreed, with Henning noting that Northwestern Mutual is okay with some co-working space. “But when it gets to 15% to 20% (of the building), we are wondering how that will impact the resale value,” he added.
When Pumper asked the panelists if anything in 2020 might give pause, Rader said that the upcoming election might give investors some pause in the second half of the year, especially in Asian markets, in which Pacific Oak Capital operates a Singapore REIT. Henning, however, had a different concern, namely an overheating market in the first part of the year. “I’m a little worried that there might be front-loading in the first half of 2020, as institutions have a ton of dry powder,” he said.
Pictured (l-r): Osama Ahmed (Brookfield Asset Management), Steve Pumper (Transwestern), Jeff Rader (Pacific Oak Capital Advisor), Bob Henning (Northwestern Mutual)
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