After Exxon Mobil departed, Hines decided to turn Greenspoint Place – a six-building complex near Interstate 45 and Beltway 8 – back to its lender, Northwestern Mutual Life Insurance Co.
The fate of two prominent commercial real estate deals spotlights the accelerating impact of oil’s price collapse across the Houston economy.
In north Houston’s Greenspoint area, the influential developer Hines is handing the keys to a six-building office complex back to its lender due to declining occupancy with no turnaround in sight. Much of the space is coming online as Exxon Mobil Corp. moves to its new campus near The Woodlands.
And in west Houston’s once-vibrant Energy Corridor, the PM Realty Group has shelved an ambitious mixed-use project that was set to be one of the largest of its kind in Houston. When it was announced last year, the proposed Republic Square was to include hundreds of upscale apartments, restaurants, hotels and high-rise office towers spread over 35 acres.
“Where the economy is right now, it doesn’t make sense to build 2 million square feet of office space in west Houston,” warned PM Realty’s Wade Bowlin.
Yet even with an estimated average of 500,000 square feet of subleases coming online each month, concern is rising that Houston may still be too bullish on real estate.
“I hate to put it this way, but there’s still a little bit too much optimism,” said Barton Smith, professor emeritus of economics at the University of Houston and a longtime chronicler of the local economy.
The departure of Exxon Mobil from Greenspoint Place, near Interstate 45 and Beltway 8, brought the 1.5 million-square-foot project’s occupancy to below 40 percent at a time of weakness in the office leasing market.
That left Hines, a local powerhouse, in the unfamiliar position of having to turn a property back to its lender. It is returning Greenspoint Place to Northwestern Mutual Life Insurance Co. in an agreement to resolve liability of a $145 million debt on the property. Houston-based Hines had owned the complex with the General Motors Pension Fund since the early 1990s.
“Considering the average occupancy rate in this depressed submarket is only about 50 percent, due largely to the fact the energy market is hurting, ownership of the asset will be turned over to the lender. We believe that is the best course of action for the property at this juncture,” Hines said in a statement emailed to the Chronicle responding to questions.
As the price of oil plummeted to a low of $26 earlier this year, energy companies that dominate many parts of Houston’s commercial regions began piling loads of space onto the sublease market. Demand for new space is virtually nonexistent. Conoco-Phillips, for example, recently put an entire 22-story building up for sublease before ever occupying it.
Hit with ‘shockwaves’
In all, more than 10 million square feet of sublease space are on the market across the Houston area, though the largest blocks are concentrated in the Energy Corridor and downtown.
Oil volatility has sent “shockwaves” through the commercial property market, with, on average, half a million square feet of subleases coming online each month since early last year, according a report from JLL, a real estate firm. By 2017, sublease space availability could grow to more than 11 million square feet.
While Smith believes the real estate industry in general should take a more realistic view of the market, he doesn’t consider its current state to be as serious as it was during 1980s oil bust.
“But it’s still serious enough to warrant our attention and careful monitoring of what’s going to happen in next two or three years,” the economist said.
According to a 2002 property deed, Hines had a $145 million loan on the property from Northwestern Mutual Life Insurance that matured in 2012.
Responding to an inquiry via email, Northwestern Mutual spokesperson Betsy Hoylman stated: “We remain confident in the future of Greenspoint Place and consider Houston an attractive area for future real estate investment.”
‘Lag’ in real estate market
The Greenspoint buildings were originally developed by Friendswood Development Co. and were completed between 1978 and 1992.
Hines and the General Motors Pension Fund acquired the complex in two parts beginning in 1994.
Smith noted that Greenspoint offers advantages to companies that may want to move there, including its proximity to Houston’s Bush Intercontinental Airport.
Smith, an economist who has reported on the Houston economy since the 1980s, said economic slowdowns are typically felt in the real estate market a year or two after they occur.
“Whether it’s a big bust or small bust, there seems to be this lag,” he said.
He said Hines got caught in an “unfortunate situation” needing to find tenants to replace Exxon Mobil during a slow market.
“Three or four years ago,” Smith said, “they wouldn’t have had a problem doing that.”