Jeff Staubach

Believe it or not, the first half of 2012 is behind us, and overall market dynamics have revealed several tenant trends. Recently, I was able to catch up with David Bale and Diana Dunlop, who work in Jones Lang LaSalle’s Houston office. We talked about trends spanning our regional boundaries. I thought I’d share a quick recap of our discussion, as it reveals a lot about what’s happening in Texas—and what it means for our business.

Q. What are the three biggest industry drivers in your market, and how are each driving demand right now?

Staubach: Overall, energy companies have been active throughout Dallas-Fort Worth. Recent large lease transactions include Merit Energy and Alon USA Energy. We’re also seeing increased activity from medical/healthcare companies (MedSynergies, EmCare) and financial companies (TexasLending.com, Texas Capital Bank, JP Morgan Chase, Town North Bank). Our technology sector is mixed in Dallas market, but for the most part, the industry is doing well. The wireless sector has continued to downsize, which impacts a large component of our tech-based tenants (Verizon, AT&T, etc.).

Bale: Houston’s energy focus has driven demand for both office and industrial space. Oil exploration is Houston’s fastest growing job sector, and is benefiting from sustained high oil prices and opportunities in the Eagle Ford Shale. As a result, jobs are being added, which in turn translates into company growth and increased office and industrial occupancies. Healthcare—in particular, the Texas Medical Center—continues to drive demand, as job figures are increasing. Hospitals are grown,g as are freestanding ER facilities , which average about 15,000 square feet each. Advances in biotechnology and other medicinal fields are also job and occupancy drivers.

Q. What is tenant sentiment in the market like now, at mid-year? How is tour and leasing activity?

Staubach: Both are up from last year, and general morale is up. On tours, multiple tenants are generally interested in the same space, so there’s a greater sense of urgency than what has been seen over the past couple of years. Some brokers have seen a slowdown in decision-making due to the upcoming presidential election, while others have said that it’s not really much of a factor. Strong submarkets include Far North Dallas (Legacy especially is active), Preston Center, and Las Colinas.

Dunlap: In Houston, tenants remain extremely active and continue to benefit from stable energy prices and increased drilling activity. But the amount of quality space in the marketplace is contracting. Tenants that are prepared to make commitments in the short-term continue to have leverage, but the window of opportunity to secure attractive long-term rental rates and quality space will soon begin to close. Touring and leasing activity are on the up in the CBD, Galleria/West Loop, Katy Freeway/Energy Corridor, and the Woodlands.

Q. Given current sentiment, what corporate/tenant strategies are you seeing, specifically from active tenants?

Staubach: Instead of simply “right-sizing,” many companies have actually started to lease additional space for near-term growth. In addition to the industries I mentioned earlier, we’ve seen this in some marketing/advertising companies, too. Corporate relocations/consolidations are still a positive for Dallas area.

Bale: We are seeing various trends across the tenant base in Houston. Law firms are looking to contract and find stability; energy firms are growing at a rapid pace and looking to secure space for expansion needs. We are also seeing an increase in demand for call center and data center users.

Q. Are there point-specific items that are key to tenants in space selection or lease negotiations right now, such as quality, location, term, flexibility, space design, image, base rent, concessions, capital?

Staubach: Time and flexibility are key right now for many tenants. During the recession, leasing decisions were often delayed or only short term deals were signed, reducing costs was key. Now with the recovery well underway for most segments, there is a greater urgency and price is slightly less important. At the same time, tenants are trying to squeeze in as many employees as they can per square foot to contain costs. Overall, our clients are cautiously optimistic and hiring accordingly. Landlords aren’t as interested in short term leases anymore so the “quick fix” might not be an option for tenants.

Dunlap: Although tenants are still cost-conscious, price is not the only decision driver these days. Many tenants prefer newer, high-quality space to attract and retain employees. Flexibility is also key, in order to help align a tenant’s real estate needs with their overall business plan. Stable ownership remains an important item for tenants evaluating options in the market. It is critical to have a landlord that values and maintains their assets while honoring the obligations of a tenant’s lease.

Q. Are there any specific examples of tenants in the market or recent leases that might help us paint the picture of demand for your market for investors?

Staubach: We’re starting to see some spill from hotter submarkets to adjacent, more economical submarkets beginning to take place. Safety-Kleen, for example, has signed a lease to move its headquarters from the Legacy area of Far North Dallas to the adjacent Richardson/Plano submarket. (The company is scheduled to backfill some AT&T space that was vacated last year, and should take occupancy in the third quarter of 2012.) This trend is expected to continue for the short term, until the construction cycle picks up once again.

Bale: We are seeing a flight to quality with several energy companies increasing their footprint and kicking off construction of several proposed projects as the lead tenant, especially in the booming West Houston submarket. For example, Nexen Energy recently relocated its headquarters from Dallas to Houston, increasing its presence from 63,000 square feet to 207,000 square feet in a new MetroNational office development. MetroNational also will start development on Murphy Oil Tower in West Houston for Murphy Oil & Gas, which leased 173,200 square feet, an almost 30,000-square-foot increase from its current space. And Atwood Oceanics will kick off Lincoln Property Co.’s development of Energy Crossing II with an 84,000-square-foot lease, up from its previous 60,000 square feet.

Jeff Staubach is a managing director at Jones Lang LaSalle. Contact him at jeff.staubach@am.jll.com.