HOUSTON-Investor interest in the Bayou City’s office market has increased dramatically over the past 12 months, and recent trades not only indicate the interest is widespread, but robust enough to push down cap rates.
For example, KBS Real Estate Investment Trust II acquired Two WestLake Park just days ago for an undisclosed amount. The 17-story, 455,142-square-foot office tower in the Katy Freeway/Energy Corridor submarket is the first KBS purchase in the market since September 2007.
Younan Properties Inc. sold the class A office building, which is 97% leased to 12 tenants including ConocoPhillps Company, Amoco Properties, Merrill Lynch, Raymond James Financial and Marubeni-Itochu. Danny Miller and Trent Agnew of HFF’s local office represented Younan.
“The Houston market has really picked up steam,” says Robert Williamson, a senior managing director with HFF’s local office. He has been involved in a number of office trades recently including Unilev Capital Corp.’s $176 million acquisition of three class A office buildings that are connected to the Houston Galleria.
The Beverly Hills, CA-based investor acquired the towers from Walton Street Capital LLC. The assets, which offer nearly 1.1 million square feet, received nine offers, Williamson notes.
“Although activity is not as strong as it was at the peak in 2007, there is very strong interest,” Williamson tells GlobeSt.com. “There is a lack of quality assets in the market, so everything that goes out gets a lot of interest. We’re seeing good interest and buyer demand from REITs, private equity, institutions and operators, among others.”
Moreover, pricing continues to increase. “People feel good again about getting aggressive in underwriting rental rate growth because the leasing market seems to be quite strong,” Williamson adds.
So far this year, roughly $83 million worth of office assets have traded hands, according to Real Capital Analytics. That doesn’t include the most recent Galleria acquisitions either. The deals that have sold this year have had an average cap rate of 8.5% and an average price of $193 per square foot.
Last year, 40 office buildings traded for more than $1.6 billion – a dramatic increase from the $414 million worth of office assets that sold in 2009, according to Real Capital Analytics. The pricing and cap rates are worth particular note: last year, the average sale price per square foot was $185 and the average cap rate was 8.5%; in comparison, in 2009, the average sale price per square foot was just $66 and the average cap rate was 10%.
“As the economy has improved, buyers have started chasing deals again,” Williamson says, adding that investment interest in the Energy Corridor submarket has been particularly robust.
For example, Energy Crossing, a 239,166-square-foot, class A office building garnered more than 35 offers from high-net worth and institutional opportunistic investors before trading to Lincoln Property Company. The seller was M&I Bank.
And, this past summer Trammell Crow sold Energy Center, a 332,000-square-foot office building in the Katy submarket to Wells REIT for $283 per square foot, the highest price per square foot in the history of Houston’s suburban office market.
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