Houston: We Don't Have a Problem

Houston: We Don't Have a Problem
All Systems Go in Houston Office Sales Market As Flurry of Investment Property Deals Expected To Hit Across City


For the past 20 years, Mary L. Carolan, an investment sales specialist with CB Richard Ellis in Houston, has been chasing a specific German investor, trying to interest it in investing in her hometown.

She's made repeated calls to this investor, one of the top pension funds, whenever she noticed it had done a deal in say, Baltimore, and try to pitch a comparable property she was selling in Houston. Never once did she get a call back.

Until now. "Let's just say that things have changed and Houston has hit the map," she said.

Last month, this same German pension fund, which she declined to name, contacted her about a property she is representing. She thought that perhaps the pension fund meant to call the home office of CB Richard Ellis in El Segundo, CA, about a different opportunity, but was told, "No, we only want to see Houston." Carolan sees it as a turning point for the city.

"To see that kind of conservative capital putting a push pin on the map, saying we want to talk about Houston, not New York or L.A. -- that's interesting," she said. "For the first time in Houston's history as a major cosmopolitan area, we're highly confident of the stability of the office product in Houston."

Houston's main selling point, which ironically had long been viewed as its albatross, is the city's ties with the petroleum industry. That used to be a deterrant for investors, given the boom-and-bust nature of the oil business. But today there's a certain acceptance of petroleum-based markets as having an acceptable risk.

For while the U.S. and much of Western Europe pursue conservation startegies to ween their economies off petroleum dependence, much of the emerging economies in India, China and Central America appear to represent virtually unlimited demand. And to the extent that worldwide demand has increasingly made oil a less-volatile commodity, so too has investor attraction to Houston, Carolan said.

"There's a belief today that investors can participate in the upside of oil right now, via real estate," she said. "We've always apologized for an economy that's embedded 50% in the oil business, but today, that's the first thing we talk about." Carolan's Houston team includes Richard Rudd and Kent Peters.

It's not just the worldwide oil boom that's lifting the office market. Other things in its favor are the fact that as a Sun Belt city, Houston it is prone to expansion, it has a well-educated labor force and the city has proven it's willing to infuse capital into local projects, such as Toyota Center, the city's sports and entertainment venue, Carolan said.

Of course, another reason investors are targeting the city is that there's a glut of capital looking for a home in real estate and investors are setting their sights on secondary and tertiary markets. There's been much talk about the private equity craze that has seen billions flow into commercial real estate. Public pension systems have also ratcheted up their real estate investments. Last year, the nation's 50 largest systems committed a record $27.3 billion of equity to new real estate vehicles, according to Real Estate Alert. That's quite a jump over 2005's turnout of $20.2 billion.

"Houston is a great market right now, it's definitely busier than it's been. There's no lack of capital and interest rates are still low," said another local broker.

Net absorption for the city was a positive 506,156 square feet in the first quarter, according to CoStar Group information. The vacancy rate stood at 13.2% at the end of March, which shows an improvement over the same period last year. Rents increased 2.1% overall to $19.76 per square foot for asking rents, compared to the fourth quarter of 2006.

Over the past two years, Houston has outpaced the nation in terms of employment growth. In 2006, Houston saw a 4% increase in the number of jobs added, compared to about 1.5% for the country, according to the Department of Labor, Bureau of Labor Statistics. The city's cumulative job growth over the past five years totaled about 12.6%, trailing only the markets of Tampa/St. Petersburg, Washington, D.C., and Dallas/Ft. Worth.

Recently, Broadway Real Estate Partners, the New York private investment firm that has made waves across the country with its deep-pocketed acquisitions, targeted Houston with its $115 million agreement to buy of One City Centre at 1021 Main St.

Another recent trade was the $67 million sale of the 412,422-square-foot office tower at 1111 Fannin St., also known as the North American Technology Center. CB Richard Ellis brokered the sale to another NY firm, Crystal River Capital Inc.

The investment sales market in Houston is about to get hotter, as several office owners are poised to take advantage of the attractive market and put their properties in play. Last week local developer Hines announced that it is shopping the 1.2 million-square-foot Bank of America Center downtown. That offering is expected to pull in more than $400 million. Holliday Fenoglio Fowler has the listing.

Chicago-based CMD Realty Investors Inc., which is in the process of selling off its remaining real estate assets, has tapped two firms to shop five properties totaling nearly 1 million square feet in the city.

Holliday Fenoglio Fowler has the listing for the 253,226-square-foot property at 1700 West Loop S and the 116,913-square-foot building known as Shepherd Place at 2323 S Shepherd Dr. The 15-story building at 1700 West Loop in the Galleria section of the city is fully leased with rents ranging from $19.50 to $23 per square foot, according to CoStar. It was built in 1976 and renovated in 2000. Shepherd Place is about 78.9% leased with rents averaging $25 per square foot. The Midtown building was developed in 1984.

CB Richard Ellis is marketing the three other properties for sale: 2603 Augusta, 2 Northpoint Drive and 2901 Wilcrest Drive. The 242,465-square-foot building at 2603 Augusta is only 52.7% leased with rents going for $21.14 per square foot. It was built in 1984. CMD is also selling the 179,756-square-foot Northpoint Central building. It is 88.5% leased with rents averaging about $21 per square foot. It was developed in 1983 and CMD acquired it in 1999.

Lastly, the private firm is selling the 156,585-square-foot horseshoe-shaped building known as Regency Center Westchase II at 2901 Wilcrest Dr. The property was developed in 1983 and is 94.8% leased with rents averaging $19 per square foot.

Here's a quick look at some of the other assets that are at various stages of hitting the market:


The Esperson Buildings, a two-building, 599,107-square-foot property at 808 Travis St. A venture between local firm Cameron Management Inc. and Amstar is selling the property, which also has an address of 815 Walker St. The towers were developed in 1927 and 1941. CB Richard Ellis is marketing the property for sale. It is about 77% leased with rents averaging $13.30 per square foot.


1001 McKinney, a 371,192-square-foot building that is being sold by a venture that includes Canadian firm SITQ, USAA Real Estate Co. and Levcor Inc. The property was developed in 1947 and renovated in 1999. The 23-story tower is about 82% leased with rents averaging $19.68 per square foot, according to CoStar Group information. HFF has the listing


The Binz Building, a 118,370-square-foot building at 1001 Texas Ave., is on the market through HFF. The building, which is owned by RPD Catalyst LLC, is a telecom hotel featuring switch site space, significant generator and riser space and multiple fiber optic accessibility. It also has an eight-story parking garage with 457 spaces. It was constructed in 1982 and renovated in 1998. It is 85.5% leased with rents averaging $18.89 per square foot, according to CoStar Group. It last traded two years ago.


West Loop I and II, two buildings totaling 337,252 square feet at 6565 and 6575 West Loop S in the Bellaire submarket of Houston, will be hitting the market within a couple of weeks. The owner of the twin contemporary glass buildings is listed as Property Texas SC One Corp. West Loop I, which was built in 1978, is 80.7% leased and West Loop II, built in 1980, is 97.4% leased. Rents go for about $18.75 per square foot, according to CoStar. HFF has the listing.


363 Northbelt, Granite Properties is looking to sell the 386,272-square-foot Class A property also known as Northbelt Tower at 363 N Sam Houston Pkwy E. The building traded for $32.8 million in 2002. It was developed in 1982. The 19-story building, which adjoins a seven-level parking garage via covered walkway, is 89.8% leased with rents averaging about $10.50 per square foot. The local office of HFF will be bringing it to market within the next two weeks.


1880 Dairy Ashford, Kennedy-Wilson International is shopping the 164,493-square-foot building. It was developed in 1983 and last sold in a portfolio sale in 2001. It is 84.1% leased with rents at about $17 per square foot. HFF has the listing and the property should be on the market within a week or so.


3355 W Alabama, a 234,231-square-foot building in Houston's Greenway Plaza submarket, just hit the market, again through HFF. It is being sold by School Employee's Holding Corp. The building, developed in 1982 and renovated in 1998, is 81.2% leased with rents going for $19.82 per square foot.