While WeWork’s precipitous drop in valuation, from $47 billion in January 2019 to some $10 billion today, has spooked some investors, it doesn’t mean all new commercial real estate plays are overvalued or not worth investing in. Capital continues to flow into these startups, especially as today’s workers redefine the workplace.
NY-based SquareFoot just announced a $16 million Series B funding round, led by DRW VC, which includes existing investors, Triangle Peak Partners, RRE, and Rosecliff Ventures. The investment follows last year’s $7 million A round and brings the total round of funding to more than $29 million.
SquareFoot is a real estate broker for companies (under 70 employees typically) seeking office space, specifically in New York, downtown Houston, and some other major cities. The website SquareFoot.com is actually quite intuitive and clean and has a similar navigation experience as Zillow, one of my favorite websites.
“There was nothing like Zillow out there for companies looking for office space,” said Jonathan Wasserstrum, CEO and co-founder of SquareFoot, in an interview with me when I asked why he started the company. SquareFoot was founded in 2011.
In addition to a nice UI, SquareFoot has two relatively new services that expand the company’s functionality. They include PivotDesk, which helps pair companies or tenants with unused office space. And FLEX by SquareFoot, which helps companies seeking shorter-term leases. PivotDesk is “Airbnb for office space,” Jonathan explained. If landlords have extra space, they can post on SquareFoot. “PivotDesk helps solve the challenges as it relates to the amount of space available while FLEX helps solve for the terms or length of leases.”
Typically, landlords want to sign 5-10 year leases whereas younger companies want to sign 3-5 yrs, so this serve can help manage this, he added, explaining that SquareFoot would sign the longer-term leases and then manage the short-term leases with its tenant clients.
The overall trend that SquareFoot is riding is the move toward flexible office space. According to CBRE, flexible space as a percent of total office inventory in the US is about 2 percent. Manhattan and San Francisco is a little higher at 3 percent. In some markets, such as London and Beijing, flexible office space accounts for more than 5 percent. Jonathan says the market is estimated to grow to 25-35 percent in the next 10 yrs.
SquareFoot’s latest investment is earmarked for expansion into new cities.
With retail e-commerce sales in the U.S. projected to soar from $501 billion in 2018 to $740 billion in 2023, it’s no wonder that Houston’s industrial market is expanding faster than Santa’s bag of toys.
E-commerce is one of the main drivers of an upturn in industrial construction in the Houston area. Estimates from four commercial real estate services companies show that during the third quarter, anywhere from 13.3 million square feet to 18.5 million square feet of industrial space was under construction in the region. That volume is up considerably from the second quarter of 2019 and from the same period in 2018.
Around the country, the “need for speed and choice” to appease shoppers is driving a lot of the increased demand for industrial space, Hamid Moghadam, chairman, and CEO of industrial REIT Prologis, recently told Wall Street analysts. That, he said, is because “the more choices you want and the quicker you want them, the more inventory you need to position near the customers.”
Rob Stillwell, executive managing director in the Houston office of commercial real estate services company Newmark Knight Frank, says many of the local industrial facilities geared toward e-commerce are being built in and around pockets of residential growth. This includes a swath from I-10 West in Katy to I-45 North toward The Woodlands. Among the facilities popping up in that corridor are massive projects for Amazon, FedEx, and UPS, according to Stilwell.
“E-commerce is likely a contributing factor to many distribution operations in Houston, but not the sole reason for the strong demand seen in the market,” Stilwell says. Many new or expanding industrial tenants in the market do have an e-commerce component, he adds, yet won’t be leasing space just for e-commerce purposes.
In Houston, the e-commerce-fueled construction of industrial space is especially prevalent near George Bush Intercontinental Airport, according to commercial real estate services company Cushman & Wakefield. However, Houston’s northwest submarket is seeing the most industrial construction in the area, with 5.5 million square feet underway in the third quarter.
Commercial real estate services company JLL pegs the southeast submarket as the hottest, with its third-quarter report showing 3.5 million square feet of new industrial projects underway there.
Aside from e-commerce, the Port of Houston and the petrochemical sector are propelling industrial construction in the area, Cushman & Wakefield says.
Around the Houston area, nine of the 89 industrial spaces under construction in the third quarter exceeded 500,000 square feet, Cushman & Wakefield says. Several of those lack a specific e-commerce element. This includes a 1 million-million-square-foot manufacturing facility for Coca-Cola, a more than 770,000-square-foot distribution center for Home Depot, and a nearly 550,000-square-foot distribution center for Costco.
Cushman & Wakefield warns that Houston’s industrial market could suffer from an oversupply of space, as well as from a drop in shipping activity prompted by ongoing trade disputes and a decline in oil prices. Although the industrial vacancy is expected to rise slightly through 2021, the company says, “demand continues for more modern, state-of-the-art facilities and market fundamentals remain healthy.”
During the third quarter, only one-fourth of the space under construction in the Houston area was preleased, according to commercial real estate services company Colliers International. However, another 10 percent to 25 percent of that inventory should be preleased before the facilities are completed, the company says.
The area’s industrial vacancy rate rose to 7.7 percent in the third quarter as new projects came online, Cushman & Wakefield says. Once more supply arrives, the vacancy rate is expected to tick up.
“Low-interest rates and robust investor demand are expected to continue generating strong interest for Houston industrial assets. On the fundamentals side, the market is closely watching new inventory additions,” JLL says.
People who think Houston is all about urban sprawl haven’t been to Houston lately. Houston’s 610 Loop has been a hotbed for infill development. A stretch of land just south of Buffalo Bayou — roughly 1.5 miles long and 0.5 miles deep — is attracting infill development at a rapid pace. The latest projects, a 600-unit mid-rise with 50K SF of retail from GID and a separate $500M mixed-use development from DC Partners, are a sure sign the city’s real estate perception is changing.
“It has been amazing to see the transformation of Houston in the decades since GID first acquired this property, and we feel patience has truly been a virtue in determining how best to knit this site into the area’s ongoing evolution,” GID Development Group President James Linsley said. The area is expected to add 1,700 new units on West Dallas between Dunlavy and Shepherd, according to ApartmentData.com. Most will be in mid-rise or high-rise projects. GID Development Group broke ground on the second phase of Regent Square, an 8-acre tract at West Dallas and Dunlavy Street, just south of Houston’s prominent Buffalo Bayou Park. Announced in spring 2019 and designed by acclaimed Boston-based architectural placemaking firm CBT, Phase 2 aims to be game-changing urban infill development, bringing an Old World-style town square into the thriving heart of Houston’s most rapidly densifying neighborhood.
Tomorrow DC Partners will break ground on its $500M project known as The Allen, set to be anchored by a 34-story hotel and condo tower. DC Partners’ The Allen will rise on a 6-acre tract, featuring 250K SF of Class-A office, a 170-room Thompson Hotel, and 95 condos. Once completed, five towers will occupy the site. Blocks away, Weingarten Realty is planning The Driscoll, a 30-story luxury high-rise with 300 residential units. The Montrose at Buffalo Bayou, under construction, will add another 224 units in an eight-story mid-rise. Hanover is planning Hanover Buffalo Bayou, which looks to be the company’s biggest project in Houston yet, with early documents showing plans for a 23-story residential tower and 21-story office building. All of this new density coming to Houston is happening in roughly one square mile. “It’s very clear one could see four or five additional towers there over a long period of time,” Weingarten Realty Investors CEO Drew Alexander said during a third-quarter conference call with analysts. Weingarten hasn’t announced formal plans for additional towers at the site near the historic River Oaks Theater, but with the rapid densification, it may be in the future. “I think it will become denser over the next 10, 20 years certainly,” Weingarten Senior Vice President Gerald Crump told the Houston Chronicle when the project was announced more than two years ago. “It is possible you could end up with the office, hotel or further residential units.”
Master-planned communities and suburban sprawl are still common in the outlying Houston areas. With few land constraints, historically Houston has had few reasons to pursue density. As renter demographics shift and the city grapples with increasingly frequent flooding issues, density and height have become favorites in Houston’s urban core. While the city has a long way to go, areas like Downtown, Uptown, Greenway Plaza and now the Buffalo Bayou southern bank show promise for Houston’s dense, walkable future.
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Texas’ tallest tower has changed hands.
The 75-story 600 Travis skyscraper in downtown Houston was built in the 1980s by developer Hines.
Now the Hines firm has teamed up with Cerberus Capital Management to purchase the tower and the adjacent 601 Travis office building.
Opened in 1981 as the Texas Commerce Tower, the 1.7 million-square-foot skyscraper was designed by I.M. Pei & Partners.
It’s about three stories taller than Dallas’ highest building, the 72-floor Bank of America Plaza.
New owners Hines and Cerberus plan to make “significant capital improvements” to the downtown Houston landmark, including “major updates to the lobby and exterior plaza area, as well as the addition of connected, collaborative workspaces and enhancements to other building common elements, and the addition of a thoughtfully designed conference center.”
Architect HOK has been hired to design the upgrades.
“Our goal is to enhance 600 Travis’ position as one of the top office buildings in the southwest,” Hines’ John Mooz said in a statement. “With significantly more activated common space and opportunities, the repositioning will promote greater tenant attraction and retention and will be a testament to Hines’ unmatched ability to maintain an asset’s architectural heritage while fostering a contemporary image for the modern workplace.”
The 20-story 601 Travis building was recently renovated with a new fitness center, auditorium and additional parking.
PlazAmericas, the former Sharpstown shopping center that has struggled to find its footing as regional malls have fallen out of shoppers’ favor, has a new owner that wants to turn around the property while maintaining the diverse culture, particularly Latino, that exists there today.
Baker Katz, a Houston commercial real estate firm, has purchased the property from a Philadelphia financial company that acquired mall out of bankruptcy about a decade ago. The developers said they intend to make improvements, but will first spend time studying what the property needs most.
Baker Katz, a Houston commercial real estate firm, has purchased the property from a Philadelphia financial company that acquired mall out of bankruptcy about a decade ago. The developers said they intend to make improvements, but will first spend time studying what the property needs most.
“It’s not our goal to come in and be the big bad developer,” said Baker Katz Principal Jason Baker. “Our goal is to build on and improve on what’s there already.”
Located at the busy intersection of U.S. 59 and Bellaire, the former Sharpstown Center opened in 1961. Frank Sharp, who developed the Sharpstown neighborhood, naming it after himself, also built the mall.
In later decades, the shopping center struggled as newer malls opened. The ownership became fractured. Baker Katz is buying the mall’s largest section, but its purchase does not include any of the attached anchor stores or the 10-story building that rises from the property.
The former Montgomery Ward, JC Penny, and Macy’s buildings all have different owners. The high-rise, too, has a separate owner and so-called out parcels closer to the road are under different ownership.
“Those agreements essentially prevent major changes from happening at the property in the near future,” said Justin Segal, president of Boxer Property Management Corp., which managed the mall several years ago and was involved in repositioning it from an outdated, struggling mall to PlazAmericas, which largely caters to area’s diverse population.
“There’s definitely a viable strategy of maintaining its current form and having an eye on the future for when it’s subject to fewer restrictions,” Segal said. “Baker Katz is a great company. They’re local, they’re well respected and they have a long history in retail.”
Retail developer Ed Wulfe, said the mall has a prime location but echoed the concern over the ownership issues.
“It’s fraught with problems that hopefully they can work out,” Wulfe said. “As far as I’m concerned, for first time it’s in hands of an experienced shopping center developer.”
Commercial realty firm CBRE put the property on the market earlier this year. There was not a public asking price. The Harris County Appraisal District values the property at $12.2 million.
The mall can be slow on weekdays, but it is busy during weekends when it becomes a gathering spot for families who come not only for shopping but also live music and entertainment for children. Still, the surrounding area has struggled from a reputation standpoint, following bouts of crime in previous years.
As Houstonians who specialize in retail properties, the Baker Katz principals said they have for years studied the mall, which they say has several advantages, including a location at a busy intersection in one of the most densely populated areas in Houston. Baker emphasized the positive aspects of the property, including diversity and community involvement.
“We want to build on what’s there and hopefully turn this perception, whatever that might be, completely turn it around,” he said. “We’re not merchant builders. This is not a slide in and slides out. We’re absolutely looking at this as a long-term hold. We want to be part of the community.”