Will Houston Office Building Sales Heat Up?

by CoyDavidson on July 25, 2010

Houston Office Assets More Attractive to Institutional Grade Investors

Houston has not always been a prime target market for many institutional real estate investors. In the past, the perception was that our economy was too dependent on the energy industry making it susceptible to economic volatility and with limited constraints on new development subject to over supply issues. However, today  the Houston office market is perceived as a strong performer and more often finding the radar of major institutional real estate investors. National Real Estate Investor recently reported that global real estate investing is up by 40 to 50% over 2009 levels. There is a ton of institutional capital looking for high quality real estate assets. How much of the pie will Houston get?

Houston investment sales activity in the second quarter marked an improvement over the first quarter, with better quality buildings trading at levels not seen since the credit crisis began in late 2008 and transaction activity came to an abrupt halt. Year-to-date through the second quarter, office transactions totaled 29 with a total dollar volume of $376M, averaging $92/SF with a 8.2% capitalization rate.

Among the most significant transactions closed in the second quarter were:

  • Wells REIT II acquired the 332,000 SF Energy Center I from Trammell Crow Company for $94M ($283/SF). Located in the Energy Corridor, the building was completed in 2008 and at time of sale was 100% leased to Foster Wheeler USA.
  • Beacon Investment Properties acquired the 162,909-SF One Park Ten Plaza from Parkway Properties for $15.7M or $96/SF. In a separate transaction Beacon acquired the 139,834 SF Atrium at Park Ten from KBS Realty for $14.9M or $106/SF. Both properties are located in the Energy Corridor.
  • Victory Realty Solutions acquired the 101,880-SF office building located at 5850 San Felipe from American Spectrum for $10.5M or $103/SF. The property was 92.3% leased at time of sale.

The largest sale of the year so far was a user related transaction, when Anadarko Petroleum Corporation acquired its Woodlands headquarters office building for $166 million at the beginning of the year.

Heritage Plaza hits the Market

Last week, veteran Houston real estate reporter, Ralph Bivins broke the story that Atlanta based Goddard Investment Group was placing Heritage Plaza, the 1.2 million square foot Class A office building located at 1111 Bagby on the market. Commercial real estate professionals have speculated the building that Goddard acquired for $121 million in 2005 could fetch a sales price of more than $300 million. Heritage Plaza is well known because of its central location in the central business district skyline, and for the stepped granite feature located on the top of the building that resembles a Mayan pyramid.

Heritage Plaza was completed in 1986 and was once the poster child of the collapse of the Texas real estate, banking, and oil industries in the 1980s. The property sat mostly vacant until Texaco leased 550,000 square feet in 1989.

However, in recent years the building like the Houston office market has performed well. In 2005 when Goddard Investment Group acquired the building, over 700,000 square feet in the project was available. In 2006 EOG Resources announced its move from 3 Allen Center to Heritage Plaza, then in early 2007, Deloitte & Touche USA L.L.P. executed a major long term lease in the project.

Heritage Plaza-1111 Bagby

  • Submarket: Central Business District
  • Total Square Feet: 1,149, 635
  • Stories: 51
  • Total Available: 161,182 SF
  • Percent Leased: 90.4%
  • Asking Rental Rate: $27.00-NNN  (triple net)
  • Operating Expenses: $13.50 PSF (2009)
  • Major Tenants: EOG Resources, Deloitte

The sale of Heritage Plaza and at what value should give us a good read on the current perception and long-term view of the Houston office market among institutional grade real estate investors.

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