Texas Real Estate Business

OCT 2017

Texas Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in Texas.

Issue link: http://texasrealestatebusiness.epubxp.com/i/885420

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Page 34 of 58

32 • October 2017 • Texas Real Estate Business www.REBusinessOnline.com M A R K E T H I G H L I G H T: F O R T W O R T H HOW WILL XTO'S MOVE IMPACT FORT WORTH'S OFFICE MARKET? The recent announcement that XTO Energy Inc., a division of energy gi- ant ExxonMobil, will be moving 1,600 jobs to Houston was not the best news for Fort Worth. The move, which will occur in waves between 2018 and 2020, will re- duce downtown's private workforce by 3 percent over the next few years and lead to several of the company's CBD properties hitting the market for sale. Broader economic implications notwithstanding, many tenants, land- lords and city officials are wondering what impact XTO's move will have, not only on the office market, but also on the downtown area's commercial real estate market. However, any worries that the move would drastically upset the down- town market's equilibrium appear to be misplaced. Most office sectors, es- pecially the CBD's Class A market and the suburban market that includes the West 7th and West/Southwest Fort Worth areas — should see minimal impact. It is even possible that most of the Class B market in the CBD will remain unaffected, as demand for re- development or from existing office users may consume much of XTO's spaces. To understand how this move could affect downtown Fort Worth, it helps to look at the bigger picture. The current CBD office inventory is just shy of 11 million square feet: 5.98 million square feet of Class A space and 5 million square feet of Class B space. Total vacancy at the end of the second quarter was 13.8 percent, with only 7 percent vacancy among Class B properties. Immediate Impacts XTO currently owns five historic of- fice properties in downtown totaling almost 615,000 square feet. Its hold- ings represent less than 6 percent of the current CBD inventory. Media re- ports indicate that XTO is planning to keep 600 employees in these buildings until 2020, with 300 employees sched- uled to remain for the long term. And while the energy firm is still de- ciding which building it will maintain for long-term occupancy, its largest office space — the 185,000-square-foot building located 714 Main St. — ap- pears to be the leading candidate. In that scenario, less than 430,000 square feet, or roughly 4 percent of the cur- rent inventory, is scheduled to hit the market for sale. Considering that va- cancy over the last five years was 2 percent higher than it is today, even a worst-case scenario would not be un- precedented. It is also important to note that XTO is not dumping these properties on the market all at once. At this point, only one of the company's core office buildings has officially been listed for sale, though it has already received multiple offers. The gradual approach to selling these buildings proves that there is no urgency to dispose of these assets without ensuring that market demand is in line with new supply. Class-By-Class Effects Class A buildings will be especial- ly insulated, as none of these would compete directly against true Class A inventory. The XTO-owned buildings have been extensively renovated with above-market improvements. But they don't meet the traditional characteris- tics found in Class A assets through- out downtown Fort Worth, and their smaller floor plates do not typically work for most Class A tenants. Thus, it is unlikely that these buildings will significantly impact vacancy, absorp- tion or rental rates for Class A build- ings in the CBD, much less for Class A buildings in the suburbs. There is also a strong possibility that one or more of these buildings may be purchased by someone with a plan to redevelop to hotel or multifamily. If that occurs, the multi-tenant, Class B office market could see less than 50,000 to 100,000 square feet of vacant space — less than 1 percent of CBD in- ventory — hit the market. Even if more vacant office space than expected hits the market, Fort Worth would hardly be in uncharted waters. Currently, Class A vacancy sits at 13.6 percent, which is almost one full percentage point lower than the rate in early 2015. Since none of these buildings are considered Class A, there would be no direct impact on Class A vacancy. The Class B market should remain strong, especially compared to other Class B properties in other metros. Va- cancy of Class B properties in down- town Fort Worth stands at 7 percent. As things currently stand, that num- ber may not rise above 11 percent as a result of this move. By comparison, Class B vacancy was 15.7 percent at the beginning of 2014. Future Outlook With the controlled disposition of XTO's downtown office portfolio and land holdings, what is the outlook for and the impact to the CBD market, which has been reported to be soft? What's coming next are deals — not only in the office market, but also in the apartments and hotel spaces. As a result, CBD land values are rising faster than we have ever seen, with few options available. Those that are available are driving premiums of 30-plus percent over prices 12 months age. In addition, over 625,000 SF of of- fice deals — both new and renewed — have been or are very close to be- ing completed throughout the greater CBD area. Some of these deals include: EOG Resources' 123,000-square-foot lease and Bank of America's 67,000-square- foot lease, both within Sundance Square; JLL's 17,000-square-foot lease within Wells Fargo Tower; UMB's 20,000-square-foot lease with- in 777 Main; Burns & McDonnell's 22,0000-square-foot lease within Pier 1 Tower; BDO's 12,000-square-foot lease within Bank of America Tower, just to name a few. LOCAL EXPERTISE. INTERNATIONAL REACH. WORLD CLASS. lee-associates.com OUTSTANDING MARKET INTELLIGENCE IN OFFICE, INDUSTRIAL , RETAIL , INVESTMENT AND APPR AISAL TO MEET THE SPECIALIZED NEEDS OF OUR DIVERSE CLIENT GROUP. Todd Burnette Managing Director, JLL

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