04/14/2010

Hines May Sell Stake in Building to Partner

A Hines partnership has asked brokers to estimate the value of the office tower at 717 Texas Avenue in Houston, likely setting the stage for a recapitalization.

Market pros think the 696,000-square-foot building could be worth $250 million, or $359/sf.

Hines, the big Houston developer and fund manager, owns the property in partnership with Prime Asset Management, the U.S. real estate investment arm of the family of Rafki Hariri, the Lebanese prime minister and billionaire who was assassinated in 2005.

The partners recently solicited "broker opinions of value," raising speculation that the 33-story tower would soon hit the market. However, local players said Hines is most likely trying to establish a price in order to sell its roughly 30% stake to Prime.

The building, formerly called Calpine Center, was appraised at $235 million at the top of the market, in June 2007, when the Hines team lined up a $160 million securitized loan. But despite the market downturn, the property may be worth more now because new leases have boosted net operating income. In 2008, energy company Conoco Phillips vacated 284,000 sf, which it was renting at $14.81/sf on a triple-net basis. Hines then shopped the space at $32/sf, and leased it up. The major tenants include power company Calpine, whose 222,000-sf lease at $24.82/sf expires at yearend 2013. Other tenants include oil and gas company Plains Exploration (162,000 sf) and law firm Jones Day (55,000 sf at $26.92/sf until 2019).

The tower is in the theater district, within walking distance of historic Market Square and Minute Maid Park, the home of the Houston Astros. It also has access to the city's tunnel system and is less than a mile from I-10 and I-45.

Houston, battered by job losses in the energy sector, has suffered declining rents and increasing vacancies. But the 35 million-sf central business district has fared better than the city as a whole. It has an 87.8% occupancy rate, compared to 83.2% citywide, according to Grubb & Ellis. The average asking rent for Class-A office space downtown is $36.54, compared to $29.65 overall. However, the submarket posted 183,000 sf of negative absorption in the first quarter and has two projects totaling 1.8 million sf slated for completion in 2011, according to CB Richard Ellis.

Hines, which has a $23 billion portfolio with about 1,100 properties, has teamed up on projects with the Hariri family since 1985. They built 717 Texas Avenue in 2003 and shopped it five years ago, but failed to get their $300/sf price.

The highest per-foot price in Houston came in the summer of 2007, when a GE Pension Trust partnership paid $289/sf, or $367 million, for the 1.4 million-sf Bank of America Center.

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