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Office Pipeline Opens in Midwest

Several recent announcements of new office building starts in Texas and Oklahoma point to developers’ renewed faith in the growth of key leasing markets come 2010-2012.

Earlier this month, Trammell Crow Co. and Principal Real Estate Investors broke ground on an 871,000 sq. ft. office building dubbed Discovery Tower at 1501 McKinney Street. The site sits next to Discovery Green, a new 12-acre, $122 million downtown park across from the George R. Brown Convention Center, which is set to open April 13.

Discovery Tower will be the first LEED Gold certified office building ever constructed in the city’s central business district. An adjacent 10-story parking structure is also planned.

This deal marks the second project in Houston and fifth in the United States being built under the national office development program established by Trammell Crow and Principal Real Estate Investors in 2006. The venture hopes to develop over $1 billion of Class-A office buildings across the country in the next five years. Discovery Tower will represent the largest single project undertaken in the program.

“Houston’s growth dynamics and positive office market outlook have contributed to our desire to invest in Houston as a target market,” says Rod Vogel, managing director of Principal Real Estate Investors. CB Richard Ellis is heading up the building’s leasing efforts.

This project comes at a time when Houston’s office market is among the healthiest in the country, tallying 5.7 million sq. ft. of absorption in 2007, the highest level in 10 years, according to Grubb & Ellis research. Downtown Class-A vacancies dipped under 10% for the first time since 2002. And while 3.6 million sq. ft. is scheduled to start construction in 2008, most of that space is being built in West Houston’s Energy Corridor, Westchase, and the Northwest Freeway submarkets.

CBD Class-A rates reached $35.97 per sq. ft. at year-end 2007, an increase of 43.4% for the year, according to Cushman & Wakefield.

And while observers expect a slowdown in leasing this year as tenants begin to shun higher rents, another major developer, Houston-based Hines, is ready to break ground on its own signature skyscraper, the 46-story, 940,000 sq. ft. MainPlace at 811 Main Street. Projected completion is in 2010.

Just across the Red River to the north, Oklahoma City could soon see construction begin on the tallest and most expensive building on its skyline, thanks to locally based Devon Energy Corp. The firm is planning to consolidate its 1,350 employees scattered around five downtown buildings into a new 1 million sq. ft., $350 million corporate headquarters with a proposed 2012 completion date.

Oklahoma City hasn’t seen anything like this in over three decades. The last downtown corporate headquarters was completed 35 years ago by fellow oil firm Kerr-McKee, and the last major multitenant office building constructed downtown was the 785,000 sq. ft. Leadership Square in 1982.

Until Devon’s announcement, the pipeline for new downtown office space was empty. Oklahoma City’s entire CBD is 5.5 million sq. ft. and saw only 74,000 sq. ft. of absorption in 2007.

Historically speaking, downtown Oklahoma City’s office market is tight. According to Grubb & Ellis/Levy Beffort, downtown recorded the lowest vacancy rate in over six years at 29.3% in fourth quarter of 2007. This is the second consecutive quarter the CBD has reached a six-year low. This trend is expected to continue as activity remains brisk. Average Class-A rates of $17 per sq. ft. are steady while Class-B rents of $13.99 per sq. ft. have increased slightly. These rents are not expected to change much for 2008.

Founded in 1971, Devon is a leading oil & gas exploration and production company based in Oklahoma City and the largest company in the state, with a market cap of more than $44.5 billion and 5,000 employees worldwide. Riding the recent surge in oil prices, its profits doubled to $1.31 billion by year-end 2007.

Devon’s new project will likely redefine the upper echelons of Class-A space in Oklahoma’s capital city, with construction costs estimated at $150 to $200 per sq. ft. The company is also hoping to have the new structure LEED certified.

The flip-side of the shiny new icon sees many local brokers worried about how quickly the market can absorb the 670,000 sq. ft. Devon is vacating for its new home. The good news — at least there are four years to think about it.

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