Will Oklahoma history repeat itself with the Devon Tower? Only time will tell.
Article: 350 million? The project is about to hit the one billion mark.
(The link was not found, but it is such a fantastic article about past projects in Oklahoma. Couldnt help posting it)
Oklahoma’s HQ Curse
Journal Record
October 10, 2008
TULSA – Can Devon Energy escape Oklahoma’s headquarters curse? As the Oklahoma City-based energy giant advances toward its $350 million construction project, it crosses swords with one disturbing trend in this state’s office market.
Over the last quarter century, few if any Oklahoma companies have successfully completed a significant headquarters project without flirting with bankruptcy or being sold. Often their signature structures also undergo significant cost cuts before completion.
Part of that reflects simple economics. Due to soaring construction inflation and the lack of strong market demand, few firms have even tried to build a high-rise office structure in Oklahoma over the last few decades.
But another side of that trend reflects the all-too-human desire to make a statement through the structure, which can inflate the project well beyond the needs.
“Sometimes I think it is an overly optimistic view of the future,” said Terry Argue, president of downtown’s Coldwell Banker Commercial Argue Properties and a past president of the Tulsa Building Owners and Managers Association. “Tenants have the ability to expand and contract and be flexible, even if they become an enormous company.
Once you build your legacy headquarters building, so to speak, you typically build it much larger than you need.” If anyone can break this historic “curse,” most analysts think it will be Devon. But the challenges loom large.
Disqualifying Utica Place due to the 10-story, $30 million tower’s large portion of residential space, One Technology Center represents the first and last major office building raised in Oklahoma since the 1980s oil bust. Built to house the Williams Communications headquarters, that 15-story glass cathedral to all things high-tech opened in 2001 just in time to see its parent company slide into bankruptcy and takeover.
While a few companies like QuikTrip or Chesapeake Energy succeeded with elegant, spreading headquarters complexes, those that plotted legacy skyscrapers like the 54-story glass prism Devon has proposed usually paid a heavy price – best illustrated by the failed Penn Square Bank’s gift of The Tower to Oklahoma City, or bankrupt Reading & Bates blessing Tulsa with what became Mid-Continent Tower.
Offices do not bear these harsh construction realities alone. Over the last 15 years rising costs forced both Oklahoma City and Tulsa leaders to endure several painful project reductions while finishing the Ford and BOK centers.
Oral Roberts University struggled to complete its 60-story City of Faith hospital complex, selling the structure within a decade as the hospital it housed failed to meet expectations.
But high-rise offices draw the greatest public attention because of the iconic role a skyline plays for a city and its cultural self-image.
Historic woes
Some analysts think Devon may escape the headquarters curse due to its different economic setting. A significant cause of the 1980s brutal energy collapse drew from rampant indulgence in expensive deep-gas drilling projects and Penn Square’s vast overselling of such loans. “I don’t think we’ve gotten out of whack with over-enthusiasm and overinvestment as we did back then,” said Robert Dauffenbach, associate dean for research and graduate programs at the University of Oklahoma Price School of Business in Norman.
But oil futures played an equally significant role in Oklahoma’s recession that decade, dropping below $10 a barrel not once but twice. That came after two decades where oil analysts speculated crude prices could be headed toward $50 to $100 a barrel or higher, dramatically influencing business decisions by not just oil executives but lenders, real estate leaders and agricultural professionals – many of whom paid the price.
Those factors led several office developers to downsize or eliminate projects, including Oklahoma City’s trimmed Leadership Square, lowered plans for Warren Place and dropped projects with what in Tulsa is now known as Mapco Plaza.
Those factors also created the lingering shadow that dogged office development through today – as energy perceptions again mirror those of the optimistic 1970s.
Over the last five years, oil analysts again have sounded the alarm that supplies are nearing an end, even as promises of ever-rising worldwide demand spurred futures prices to top one milestone after another. Those factors led the nation’s energy industry to invest billions in new refineries, pipelines and other infrastructure, all based on the assumption that general demand for oil and natural gas will only grow. That mood continues even in the face of oil futures changing course this summer, falling from $145 to $86 a barrel.
This came just a little over a year after natural gas prices sank so low, some producers debated bottling their supplies in the ground to wait for better days.
With many pipelines coming online over the next few years to deliver new Rocky Mountain and Canadian supplies to market, even as more new and enhanced refineries begin to pump out more gasoline, some analysts question whether Americans may see even greater commodity price volatility.
Since construction inflation spikes heavily tax corporate cash flow levels that, with firms like Devon, are heavily dependent on commodity prices, such volatility threatens to play havoc with large building projects.
But just as Devon successfully navigated through the ‘80s oil bust, emerging through the 1990s as a national leader, spokesman Chip Minty said the company has the resources to ride out today’s price fluctuations. “We have a good deal of cash on hand that is allowing us to fund our capital projects, plus we have a strong revenue stream as well,” he said. “That’s not a concern of ours. We also continue to grow our production on an annual basis.”
Devon just set its ninth consecutive quarter of growing production through drill bit, he said. “We expect to continue that growth trend through the rest of this decade and beyond,” said Minty.
With more than 40,000 undrilled locations in its portfolio, Minty said Devon may counter any dramatic price drop by ramping up production. “We go by a business plan that accommodates volatility,” he said, noting the company did quite well with oil prices below $100 a barrel.
“The fact that the commodity market’s volatile right now does not bring undue concerns.”
Positive factors
Devon may have an ally in one construction element. “We’ve endured double-digit increases in construction costs for the last four years,” said architect Rachel Zabrowski, studio director for Miles Associates Tulsa, “but now construction costs are apparently going down.”
But another factor shaping today’s construction industry may be more unforgiving. The credit crunch and financial industry shakeout has undercut lender support for even the strongest firms – and not just in the office market, but retail and industrial, said Robert Pielsticker, a vice president and industrial specialist with CB Richard Ellis of Oklahoma.“If you’re not already out of the ground and you’re not 100-percent pre-leased, it’s not going to happen,” said GBR Properties broker Bob Parker, speaking from the retail viewpoint.
While Devon has not said how it will fund its project, Minty said the company may not use any outside lenders. “We’re in position to pay for this building over the four-year life of the project,” he said. “They have ultimate control,” said M. Jake Dollarhide, chief executive of Longbow Asset Management of Tulsa, who considers Devon one of Oklahoma’s strongest companies. “They’re one of the few companies headquartered here that’s part of the S&P 500. Frankly, with the acquisitions they made in the ‘90s, they’re one of the largest E&P firms.
They have a pretty powerful one-two punch in onshore and offshore drilling, and they have international stakes. If you name a shell, they’re in the shell.” The basic truth breaks down to this: Even at $400 million or more, the construction project may not present a major burden to a company generated $1.32 billion in free cash flow from operations, minus capital expenditures, just in the first six months of this year, said James Carnett, senior portfolio manager with Fredric E. Russell Investment Management Co. of Tulsa.
While that did reflect surging oil prices, Carnett said projected 2008 total production of 240 million barrels of oil equivalent should still deliver strong, if reduced, cash flow rates going forward.
“Devon has $5.4 billion in debt versus $23.4 billion in stockholder equity, so their debt to total capitalization ratio is a conservative 19 percent,” he said. “Adding $750 million in debt with their balance sheet should not be a problem.”
Future benefits
From a real estate standpoint, Devon’s proposal still stretches the basic economics of Oklahoma’s office market. Argue, whose firm manages Mid-Continent Tower, said the Devon project cost comes in at about $400 per square foot. If the company were to rent the space, Argue said Devon would need to charge $35 to $40 per square foot just to break even.“That’s three times the current rate,” he said. “In our market, our rental rates have not kept pace with the cost of building a new building.”But from an ownership standpoint, building the tower will allow Devon to gather all their 1,500 Oklahoma City employees to one location, rather than spread them out in the five buildings they occupy now.
Minty said it also would accommodate projected growth to 2,000-plus workers before its completion.“There are significant advantages in production when you have space designs that allows employees to be in contiguous space,” said Argue. “And in terms of the overall cost of running a large business, the cost of real estate is not a significant factor.”
Having seen aggressive, optimistic companies crash and burn building similar projects, Argue understands the concerns of real estate observers watching Devon’s project advance. But he also sees opportunity, since many of Oklahoma’s construction booms started with someone like Devon willing to take the risk, which reset Class A expectations and drew competitors.
“We’ve missed out on about 25 years of changes and enhancements,” Argue said of construction and architecture advances. While longtime Tulsa office market analyst Ken Tooman does not expect the Devon project to jump-start a new wave of construction, he agreed it could set a new standard for Class A space.
“It may initially have a negative impact on the market,” said Argue, since it will free up Devon’s existing office space. “But that softness may be offset by existing companies, and possibly of a new company moving to Oklahoma City to be close to a Devon that’s growing.”
The national exposure Argue expects Devon to attract with this project will enhance the spotlight downtown Oklahoma City will gain from its new NBA franchise and other events – and that could reverse the headquarters curse, perhaps even spreading to Tulsa’s still-healthy economy as the BOK Center and other projects gain momentum.“The whole deal with a building like that, it’s just exciting,” he said.
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Oklahoma’s HQ Curse
Lookin' forward to it....
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