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Perk up or Trickle Down? Opportunities for New Business

Many contractors and sub contractors don’t pay much attention to the real estate cycle until it impacts their business and then it gets really personal for them, owners and employees.  When we are in the middle of a recovery and our workload consumes our every waking hour and a few of those sleep hours as well, we rarely step back to take a look at the bigger picture and can overlook major opportunities for business.

We thought that it might make a little sense to take a quick look at the overall market and offer an opportunity that you might want to consider.

The economic recovery has “thrown a wrench” into the markets, especially that part of the cycle that I call “Perk Up and Trickle Down.”  There are so many generational, tech, and social forces at play today that many building owners, tenants and even construction folks whose leases are expiring are confused.  Are you?  Step back for a minute and consider the current markets.

Trickle Down – Houston’s real estate market is currently a “Landlord Market” with the number one office construction market and 70-plus new buildings underway.  When this shift occurs, lease rates for Class A new construction soar up to the $50 per square foot level, and vacancy rates drop like a rock.  Tenant build-out or Tenant Improvements (TIs) for the basics hit $50 per square foot and executive space can reach up to $250/sf according to local sources.  In the current heated market when rents are soaring, any cost-conscious tenants whose leases are expiring will experience “sticker shock” when they begin to look around and either pay the new rates (sometimes over triple their current rents) or more often, “trickle down” to Class B or C space in older buildings.

Perk Up – On the other hand, when the markets shift to a “Tenant Market” where vacancy rates climb, landlords offer incentives like “Free Rent” to attract tenants and keep their buildings full – we get the “Perk Up” effect.  Tenants in Class B and C buildings negotiating new leases tend to move up into better space for the same rent than they were paying in the old space.  That is the normal cycle – Trickle Down during the boom and then Perk Up or move up during the down cycles.

But this isn’t entirely a normal cycle.  This is a boom and a “Landlord Market,” but there are paradoxes and disrupters at play that the Class B and C building owners have to consider when they try to compete in this cycle.  One of the major disrupters is the recruiting of Next Gens and the amenities that they require.  The new buildings are addressing the new requirements.  Older buildings that were Class A buildings in 2005 or 2006 are suddenly Class B buildings, and the owners of those buildings will have to scramble to keep up and compete with the “green field” Class A buildings that are coming out of the ground today.  That is no small task, and is a task complicated by the disrupters.

A number of major companies in tech and energy are building new campuses to accommodate their new business and the “new talent management” requirements that they will face in the next generation of workers.

A current example is the new Exxon campus, designed and built in the normal Exxon mode: research trends, talk to futurists, demographers, HR professionals, look at other campuses of the “best of the best” around the world in Oil and Gas as well as in the top businesses in the high tech world who are recruiting and hiring Next Gen workers now.  The result is that the new Exxon campus construction project just north of Houston is “state of the art” for recruiting the best and the brightest.  They have begun their move in, but in the process they leave behind several million square feet of space in what were Class A and B buildings but, in the wake of the new construction, are now considered, at best, Class B and Class C buildings that will have to be remodeled and upgraded to even compete in the marketplace.

Those B and C buildings will need new exterior skins, smart energy systems and public spaces that were not considered by the designers of the original building, some of which were built in the 1980s.  The result is that there is a growing demand for redesign and reconfiguring the existing building stock not just in Houston but around the country as well.  That is a major opportunity.

Contractors and subs, even if you are in the midst of the “boom”, you should be looking to the Class B and Class C buildings owned by companies that are determined to stay competitive by renewing their building skins and systems, upgrading their public and lease space, applying LEED standards, and adding amenities to help the owners compete for tenants against the newer Class A space.

So while we are in the midst of the “Trickle Down” phase of the market, what we are recommending to you is to look at the Class B and C buildings for work in addition to the Class A green field buildings that you are estimating bidding and building today, so that when the boom is over and we are again in the “Perk Up” market phase, you will have plenty to do.

Oh yeah, that is if you have the available qualified craft workers to do that work.  But that is another issue.

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