12/05/2012

Red-Hot Houston Sees Blockbuster Office Deal

Continuing the record pace of Houston office sales, Invesco Real Estate has agreed to pay Hines about $420 million for the 1.5 million-square-foot Williams Tower.

If the deal closes, it will mark the top price in total dollars ever paid for a Houston office property outside the central business district. At the roughly $280/sf price, Dallas-based Invescoís initial annual yield would be about 6%.

Hines, which has its headquarters in the building, is being advised by Jones Lang LaSalle. The assignment was a major coup for the brokerage, which hadnít been a major player in the Houston market. Jones Lang won the listing with a pitch led by Los Angeles-based managing director Michael Zietsman, a former Lehman Brothers executive with extensive institutional contacts.

The deal likely wonít be finalized before yearend, but Houstonís 2012 office sales have already set an annual record. With December closings still to come, some $2.4 billion of office properties worth $25 million or more have traded hands this year, according to Real Estate Alertís Deal Database. The previous high mark was $2.2 billion in 2007.

Investors have flocked to Houston properties as a flourishing energy industry continues to create jobs and a demand for space. Invesco is doubling down on its bet on the city: In March, it paid $334.8 million, or $400/sf, to buy the 837,000-sf Reliant Energy Plaza from German fund operator KanAm, in a deal brokered by CBRE.

The Williams Tower deal would be Hinesí second blockbuster sale in Houston in a matter of months. In August, it sold the 1.8 million-sf One and Two Shell Plaza downtown for $550 million ó shattering the cityís previous office-price record of $442 million, set in late 2011. HFF brokered the deal for Hines. The initial annual yield for Shell Plazaís buyer, Houston-based Enterprise Products, is roughly 6.75%.

Williams Tower drew interest from both foreign and domestic investors. Local pros said the pricing was solid, although it fell short of some early expectations that it could trade for as much as $475 million. They noted there is a limited pool of buyers for such a big property outside a downtown area. There is strong potential for Invesco to improve its return because in-place rents are about 25% below current market rates, which run about $27-$28/sf on a triple-net basis.

The 64-story tower is at 2800 Post Oak Boulevard in the Galleria/West Loop submarket. Hines built it in 1982 and subsequently sold it, but bought it back in 2008 for $271.5 million, or about $180/sf, via its Hines REIT. The seller was the government of Kuwait, advised by its Fosterlane Holdings arm in Atlanta.

The occupancy rate is 96.5%, according to CoStar. Williams Cos. subsidiary Transco Energy occupies 277,000 sf until 2021. Hines occupies 135,000 sf. Other tenants include Rowan Cos. (98,000 sf), Quanta Services (78,000 sf), Citgroup (48,000 sf), accounting firm BKD (45,000 sf), Rockwater Energy Solutions (45,000 sf) and law firm Roberts Markel (36,000 sf).

The building has LEED Gold certification, the second-highest rating for sustainability and energy efficiency. An adjacent 12-story garage has 3,200 spaces. A skywalk connects the tower to the Galleria mall, one of Houstonís top shopping destinations, which Hines also developed. The property was originally named Transco Tower, but was renamed in 1999 after Williams acquired Transco.

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