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'See-Through' Interiors : Office Glut: It Sweeps the Country

July 06, 1985|J. MICHAEL KENNEDY | Times Staff Writer

HOUSTON — Not far from Houston's central business district stands the glistening new 34-story Phoenix Tower. Thirty-three of those floors are empty.

Behind the building's skin of blue-green glass is an interior that is decorated only with naked wiring and bare metal--huge, empty spaces that are hot and dusty with grit from unfinished cement floors. Although the tower was completed last year, its only occupied part is a small 11th-floor office used by building management as the search goes on for a client big enough to open the building.

Finding such a client is an unlikely prospect at the moment. This is a city of "see-through" buildings with no interior walls to block one's view of the under-used structure next door. Houston has more than 37 million square feet of vacant office space--twice the footage of all the commercial buildings in Kansas City.

New Office Construction

Between 1980 and 1984, 471 office buildings were completed here. Construction has now slowed considerably, but across America, real estate and investment experts say, dozens of other cities appear to be new Houstons in the making.

Unlike past boom-and-bust cycles in office construction, today's surge in building has not been significantly moderated by the lack of demand for additional space. Instead, billions of dollars in investment money looking for a place to alight are creating a forest of lonely high-rises.

The Office Network Inc., which tracks the commercial market in 22 cities, estimates that 318.4 million square feet of office space is either available now or under construction in those 22 cities. That figure is roughly equal to the total office space in Denver, Atlanta, Boston, Miami, Philadelphia, Pittsburgh and Cleveland. Put another way, it is the rough equivalent of 150 Empire State Buildings, each with 2.1 million square feet of rentable space.

'Country Is Overbuilt'

"The entire country is overbuilt," said Kenneth Sandstad, vice president and general manager for Coldwell Banker Commercial Real Estate in Dallas. David Shulman, the vice president and director of research planning for the Los Angeles-based TCW Realty Advisors, said: "In terms of square footage, it's probably the highest in human history."

The result is that investments that looked very good two years ago now appear very shaky. Many investors, including some savings and loan associations that plunged heavily into construction financing, may be on the verge of hard times, according to industry analysts.

Several factors contributed to the open-ended funneling of bil lions into commercial real estate:

--Booming Sun Belt cities like Houston made a need for new construction obvious, and sometimes the enthusiasm lasted longer than the need or carried over to cities where the need was less compelling.

--Federal tax incentives passed in 1981 offered investors advantages even if the buildings they financed were under-used, and, for many, such tax shelters seemed too good to pass up.

--Deregulation of savings and loan institutions in 1982 gave added impetus to the boom by allowing such institutions to steer away from their historical role as makers of home loans and into commercial real estate ventures that looked more profitable--but were also more risky.

--Foreign investors, and particularly those in oil-producing nations--found American real estate investments less hazardous than other investments here and abroad.

--The traditional investors in commercial real estate--huge corporations, banks, pension funds and insurance companies--all envisioned good profits and stayed in the market with a vengeance.

Beginning of Boom

Virtually all real estate experts and developers agree that the present building boom began in the late '70s, when there was an undersupply of office space. Developers cranked up to fill the void, but in many cases, the building continued right through the recession of the early '80s.

One important spur to investment came with the new tax law of 1981, which allowed developers and investors to accelerate their depreciation on projects to 15 years from 30 years. In other words, the costs of an entire project--exclusive of land costs--could be deducted from taxable income in 15 years, making it a major shelter from income taxes. That number was later raised to 18 years and President Reagan's new tax package would increase it to an even less favorable 28 years.

The law, when passed, was intended to spur growth, but now the Reagan Administration is intent on recouping some of the tax money lost from large write-offs.

Incentives to Overbuild

"Yesterday's incentive--today's loophole," said one Washington economist.

Barton Smith, the director of the Center for Public Policy at the University of Houston, agreed.

"I think right now there are federal tax incentives to overbuild, and that is a national problem," he said.

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