Brookfield Snares Big Houston Office Tower

Brookfield Office Properties has agreed to buy Heritage Plaza in downtown Houston for about $325 million in one of the biggest office trades in the city's history.

The seller, Goddard Investment, struck the sales agreement for the 1.2 million-square-foot trophy property after talks with another bidder, USAA Real Estate, fell through.

At the $285/sf price tag, New York-based Brookfield's initial annual yield will be roughly 6.25%. Eastdil Secured's Atlanta office is brokering the transaction, which exceeds the pricing expectation of $310 million and further demonstrates solid investor demand for core properties.

Atlanta-based Goddard began shopping the 53-story tower in June. USAA won a bidding contest against Brookfield, Tishman Speyer of New York and others with a $333 million offer. Goddard and San Antonio-based USAA then came close to finalizing a deal, but the talks broke down when USAA was unable to line up financing to its liking.

The owner then began exploring a possible recapitalization or refinancing. First, it lined up a commitment from MetLife for a $200 million fixed-rate loan with a 12-year term. Then it agreed to sell the property outright to Brookfield, which will use the MetLife loan to finance the transaction.

Heritage Plaza, at 1111 Bagby Street in the central business district's "Skyline Corridor," was acquired by Goddard in July 2005 from Michigan Retirement for $121 million. At the time, the occupancy rate was only 45%, following the departure of lead tenant Chevron Texaco, which had leased 700,000 sf.

Goddard recruited new tenants, including Deloitte (292,000 sf) and EOG Resources (252,000 sf), bringing the occupancy rate in line with the 89.5% average for the central business district. Other tenants include BASF, Lime Rock Management and Tudor Pickering Holt. In-place rents are 30% below the market average.

Goddard tried to sell Heritage Plaza three years ago. Market pros thought the property might command as much as $430 million, or $374/sf - a valuation that would have shattered pricing records for Houston office properties. But the market turned down, and Goddard pulled the listing.

The Brookfield transaction would mark the second-highest price ever paid for an office building in the city on a dollar basis and the third-highest on a per-foot basis. The record for each category is held by the sale of the 1.3 million-sf Bank of America Center in August 2007 for $367 million, or $289/sf. A GE Pension Trust partnership bought that property from Houston-based Hines.

This year, only a handful of office properties in the nation have traded at a higher price than in the pending Heritage Plaza deal. The largest single-property transaction came when KBS Realty of Newport, Calif., paid $655 million, or $504/sf, for the 1.3 million-sf office building at 300 North LaSalle Street in Chicago. Holliday Fenoglio Fowler advised the seller, Hines.

The biggest completed office trade in Houston this year was the sale of the 332,000-sf Energy Center 1 for $94 million, or $270/sf. Wells Real Estate of Atlanta bought the property in July from a Trammell Crow partnership, which was advised by CB Richard Ellis. The bidding war over that property, which resulted in a 7.2% capitalization rate, caught the eye of Houston property owners, and a rash of big office offerings followed. Local players said they were anxious to see those properties begin to clear the market, so the Heritage Plaza deal is welcome news.

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