Many companies with offices closed their doors during the pandemic, as the lockdown forced bosses and employees alike to work from home and tune into online video meetings or communicate via workplace messaging apps.
However, most companies are now asking employees to return to in-person work, while others are choosing to adopt a hybrid schedule – requiring people to be in the office for several days of the work week – or transitioning to fully remote work.
These changes are reducing the demand for office space across Houston, as the city’s current overall office vacancy rate is 22.1 percent, according to Colliers Q2 2023 Houston Office Market report.
Despite the slight decrease from a 23.5 percent vacancy rate at this time last year, high vacancy rates are expected to remain as companies favor newer construction and leasing less space, according to Taylor Wright, senior vice president at Colliers.
“There are some older buildings downtown that will probably never reach maximum occupancy again.”
“There are some older buildings downtown that will probably never reach maximum occupancy again,” he said. “Tenants are leaving this older stock because they may not be as efficient or have the same shine as newer buildings and offer the same amenities.”
Commercial tenants often look for additional benefits, including open working space, private offices or shared public outdoor areas such as a patio. Newer buildings that are younger than 15 years old are likely to have these layouts, while buildings older than this are not.
Wright said this decreases the life cycle of many downtown buildings, as most were constructed before 1986, with six of the most recently built in the early 2000s.
“I do think at the end of the day, a number of buildings are just going to be obsolete,” Wright said. “Then it’s going to be up to a new group of investors or the bank to figure out – which right now is very difficult to come by, especially for well-capitalized office buildings – what to do.”
Wright said some developers are taking matters into their own hands by converting these older vacant office buildings into residences. While others have discussed using their spaces for vertical farming or transforming them into recreational areas, such as paintball parks.
Dougal Cameron, the president of Cameron Management, is working with a partner on a residential and mixed-use conversion of the Esperson office complex. They started the project in November 2022, and plan to create a building where entrepreneurs can both work and live.
“You’ll notice a lot of the new residential developments like CityCentre have residences right next door to offices and workout facilities,” Cameron said. “They have somewhere you can live, work and play and never get out of your car, and that works. We are trying to do that, but all in one office building.”
Life Time Work, a premium coworking space, is one of the facilities located in CityCentre and offers members of the Life Time athletic country club (also in CityCentre) the ability to focus on their workday while simultaneously having the flexibility to work out nearby.
James O’Reilly, vice president of Life Time Work, said Life Time incorporated this workspace as they saw increased clients working on their laptops in their athletic clubs.
Once their first Houston area Life Time Work location opened in CityCentre, they saw an increase after the pandemic’s peak not only in individuals coming in but companies too – not wanting to set up shop back in a permanent office before they knew what their employees’ needs would be.
“The flexibility that we offer draws many of these larger companies in,” he said. “They aren’t quite ready to make a large investment in a long-term lease of a traditional office space, so they come to us.”
O’Reilly said their proximity to the partnering workout space and the mixed use of shared space, but private office and boardroom spaces provides the amenities most employees now look for and bosses want to deliver in workspaces.
Cameron said the flex office system is also what they have planned for Esperson while merging the residential component and some retail space offerings on the lower levels of the building once they are done with development.
The residential conversion has yet to start; however, they are leasing 60 percent of the available office space to various tech-related and finance companies.
Cameron said despite all their building is offering, finding tenants to secure these leases while development is pending was not easy. This is why they want to continue to meet what is in demand to keep them in their facilities.
“The struggle is real, and we are overbilled. If you’re a completely vacant office building, your only option is either to lease it up or tear it down or find something new to do with it,” he said. “Because every year that it remains vacant, it costs a huge amount of money in taxes and insurance or electricity, fixed costs that you have whether there’s a tenant or not.”
They’ve received all the required permits for the project. Older office spaces like these are good for residential conversions because their floor plans usually create less depth between the buildings’ core and windows (each residential unit must have one window.)
However, when it comes to life safety systems in these buildings, developers can face challenges like at Esperson, where the external staircase caused issues since that construction feature is uncommon for Houston.
Andy Icken, chief development officer with the city of Houston’s economic development department, said residential conversions have to be unique to the configuration of most buildings as obstacles will come up on a case-by-case basis.
He said Houston works with downtown management districts to assist and consult developers wanting to pursue conversion projects. The most substantial changes are usually made to utility infrastructure and life safety systems to ensure people can exit and enter while these structures follow building codes.
“I would expect we will see more conversions like these, it takes a fairly intense architect and developer to go through all this to make it happen, but we start here in Houston with no zoning regulations,” he said. “Those tend to inhibit this work in other cities, but it is not an issue that would limit the ability to do this here.”
Wright said the downside to residential conversion is it can become quite costly, especially as developers have to spend a lot of money upfront, and build-up can cost more and take longer.
And the demand for the residential, commercial and entertainment to be all grouped into one converted vacant office space is not necessarily there in large numbers – meaning that these spaces could be built but would tenants want to live there.
“Let’s say I have a million dollars, well for that million dollars, my options are wide open to look at other high-rise living opportunities, or I could live in a nice house for a million dollars,” Wright said.
This article appears in Jan 1 – Dec 31, 2023.
