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REA
December 06, 2017  

Baupost Near Deal for Marathon Oil Tower

A Baupost Group partnership has emerged as the winning bidder for Marathon Oil Tower in Houston, capping an on-again, off-again marketing process by CBRE Global Investors that spanned two years as the property’s value sank.

A joint venture between Boston-based Baupost and local firm M-M Properties is hammering out an agreement to purchase the 1.2 million-square-foot office building for roughly $175 million, or $146/sf — well below the $249.5 million that CBRE Global paid in 2013. After several false starts, the Los Angeles investment manager appears to be serious about completing a sale this time, though a deal is unlikely to close by yearend.

CBRE Global listed the Class-A skyscraper in September with HFF — the third brokerage to take the assignment within two years. The offering came amid increased market liquidity in Houston, as the city recovered from the oil-price crash and proved resilient after Hurricane Harvey.

Several bargain-seeking investors chased the deal. Part of the pitch was that unlike many other top markets viewed as near the peak of the current cycle, Houston has already had its correction and is better positioned for a rise in valuations amid a stabilization of oil prices.

The 41-story building, in the West Loop/Galleria submarket, is 90% leased. Rents average nearly 50% below the city’s typical asking rent. The namesake tenant, Marathon Oil, has a lease on 62% of the space that expires in 2021, and it’s uncertain whether the company will renew. Market pros said the longer CBRE Global held on to the property and the more the remaining lease term dwindled, the steeper the discount demanded by investors.

CBRE Global first put Marathon Oil Tower up for grabs in late 2015 via its CBRE brokerage affiliate. Some thought it would fetch as much as $300 million at that time, but that proved overly optimistic as oil prices were sliding downward. Investors wanted a discount for the rent roll’s heavy exposure to the energy industry and the uncertainty over Marathon’s long-term commitment to the property. Eventually, CBRE Global entered into talks with an unidentified buyer at a $260 million price. But a sale never materialized, and the listing was pulled.

At the beginning of this year, CBRE Global again put the skyscraper on the block, this time giving the marketing assignment to Eastdil Secured. In the spring, the investment manager struck a preliminary agreement to sell the building to Hertz Investment of Woodland Hills, Calif., for $195 million. But that deal collapsed for unspecified reasons, sending the seller back to the drawing board and setting the stage for the potential deal with the Baupost partnership.

CBRE Global controls Marathon Oil Tower via its $1.6 billion Strategic Partners U.S. Value fund 6, which it is winding down. The firm has pumped $7 million into upgrades, on top of the $12 million that the namesake tenant invested in its space. CBRE Global also boosted net operating income by raising rents. The building, at 555 San Felipe Street, was completed in 1983 and has a LEED silver designation. ?