Distressed Complex on the Block in Houston

A receiver is marketing a distressed retail/office complex in downtown Houston that is expected to trade at a steep discount to its replacement cost.

The 568,000-square-foot Houston Pavilions was completed in 2008 at a cost of $175 million to $200 million. The developer, a partnership that includes Buchanan Street Partners, said the project would ďredefine the urban coreĒ of the city and boost its nightlife. But while the 261,000-sf office portion is fully leased, the retail space has struggled to attract tenants. Market players estimate the complex is worth only about $128 million.

Transwestern was appointed as receiver late last year. The Buchanan Street partnership has agreed to turn over the keys in lieu of foreclosure. A buyer would likely want to reposition some of the retail space as offices.

NRG Energy has fully leased the office space until 2021. Tenants at the 307,000-sf block of stores, restaurants and entertainment venues include Books-A-Million Superstore, Forever 21, the House of Blues and Lucky Strike Lanes.

But the retail portion remains 41% vacant. Making matters worse, more than half of the retail tenants havenít been paying full rent because the overall retail occupancy rate remains below the prescribed threshold cited in their leases.

A buyer could convert about 42,000 sf of vacant retail space into offices to exploit downtown Houstonís booming office market, whose 32 million sf of Class-A space is 93% leased. That would produce immediate income while the buyer tried to lease the remaining retail space. However, a conversion of all the retail space isnít an option, because doing so would make it impossible to meet the retail occupancy threshold necessary for the existing tenants to pay full rent.

The property is on four acres at 1201 Fannin Street, near Discovery Green Park, the Toyota Center and the George R. Brown Convention Center. It encompasses two buildings, including an 11-story office tower, connected via walkways on lower levels and sky bridges above. An adjacent garage has 1,500 spaces.

Buchanan Street, of Newport Beach, Calif., contributed $47 million of equity to the complexís developers, William Denton and Geoff Jones, who owe $130.7 million to U.S. Bank on a defaulted construction loan. Municipal agencies also provided backing for the project.

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