800_bgplaceHines is known for developing iconic buildings in Houston—notably One Shell Plaza, Pennzoil Place, and the Houston Galleria—and around the world. But when the company first proposed developing a new office building on a blighted block in downtown Houston, many in the Houston real estate community scratched their heads. The block was a problem location for the city and lay at the center of a good deal of criminal and unsavory behavior; many commercial real estate brokers said, “Don’t go there.”

But the negative image of that block and the immediate area was part of what compelled Hines executives to focus on the site. Notes Mark Cover, chief executive officer (CEO) of Hines Southwest region, “I felt that if this block could be rejuvenated in a really substantial way, that it would have a tremendous ripple effect on downtown.” He and his colleagues at Hines believed that it would be in the best interest of downtown Houston to remove the blight on this block; and that if they were successful, they could create value not only for Hines and its investment partner, but also for surrounding areas and the city as well.

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Despite the problems the site presented, it did offer several attractive features, the most compelling of which was a strategic location. The site lies very near the center of downtown Houston, on Main Street, and offers direct access to a new light-rail line and stop along this street.

BG Group Place is a 960,000-square-foot (89,000 sq m), 46-story office building on a 1.26-acre (0.51 ha) redevelopment site in the center of downtown Houston. The building has been certified Leadership in Energy and Environmental Design (LEED) Platinum by the U.S. Green Building Council (USGBC) and incorporates numerous green features, including sunshades on the facade to reduce heat loads in summer. The construction of BG Group Place has had a regenerative effect on the immediate neighborhood and the central part of downtown Houston. The building is known for its striking architecture and the sky garden near the top, which gives the structure a unique profile on the Houston skyline. Construction began in March 2008 and was completed in January 2011. As of February 2015, the building was 98 percent leased.

When construction commenced in March 2008, the vacancy rate in downtown Houston was very low, but the U.S. economy was already in recession and the financial crisis was beginning. Notes Cover, in early 2009 “we had some conversations with our partner about stopping, but at that point we were so far in that we would have taken a very significant loss, so we kept going.” In addition, notes Philip Croker, managing director with Hines, “We believed that the market would have a quick recovery and that we were well positioned to take advantage of that.” Observes John Mooz, senior managing director with Hines, “We stayed committed to our vision, and that proved to be the correct approach.”

The equity for the development was provided by the HC Green Development Fund Limited Partnership, a partnership of Hines and the California Public Employees’ Retirement System (CalPERS). The fund was established in August 2006, and BG Group Place is the second investment that the fund has made. The HC Green fund focuses exclusively on developing sustainable office buildings throughout the United States. Hines serves as the general partner and CalPERS is the limited partner. CalPERS is the nation’s largest public pension fund with assets totaling $218.5 billion, of which $15.4 billion is invested in real estate.

CalPERS preferred to be conservative on the debt financing, so the debt was kept at a relatively low level, with a roughly 50/50 debt/equity split in the financing plan. The construction loan was finalized in August 2008, after construction had begun and right before the financial crisis really took hold. Two weeks later, Lehman Brothers went down. The loan was one of the last major construction loans done prior to the financial crisis.

Debt capital for the development was provided by a consortium of six banks led by J.P. Morgan and Wachovia (which later became Wells Fargo); others included Bank of America, BBVA Compass, Whitney Bank, and Oklahoma Fidelity. Two of the banks in the consortium were merged into or purchased by other banks by the time the building was complete. The total development cost was in the range of $325 million to $350 million.

As with most Hines downtown office buildings, the objective of the design was to erect a high-quality building with world-class architecture. At the time the building was being designed, however, considerable concern existed about creating a structure that was practical and cost-effective as well. Jon Pickard, co–founding principal of Pickard Chilton, says, “The building needed to be really efficient to be successful in the market. We started with the notion of going beyond the box, but we couldn’t go too far beyond the box because tenants are looking for efficiencies [in their space].”

BG Group Place includes 46 stories and approximately 1,565,000 square feet (145,000 sq m) of gross building area, including 1 million square feet (93,000 sq m) of office space, 15,000 square feet (1,400 sq m) of first-level restaurant and bank retail space, and 550,000 square feet (51,000 sq m) of parking space, including 1,120 parking spaces. The building includes 960,000 square feet (89,000 sq m) of net rentable area. Floor sizes in the building range from 26,100 to 28,100 square feet (2,400 to 2,600 sq m).

The plan for the project had been from the start to build it, lease it, and then sell it, as the strategy was to maximize return on capital rather than holding it long term. In spite of the financial crisis, the developers were able to execute this plan. The partnership retained Eastdil Secured to explore the sale of the building. They made a strong pitch to major pension funds and international investors alike. Following substantial lease-up, which was largely achieved by January 2013, the building was sold in May 2013 to Invesco Real Estate, representing a foreign investor, for an undisclosed amount. The sale price was roughly what Hines had projected, though the hold period was longer than the original pro forma estimate. The sale price has been widely reported in the press to be in the neighborhood of $480 million, and the buyer has been rumored to be a South Korean pension fund; neither the seller nor the buyer has officially disclosed the sales price or the name of the foreign investor. The price at the time of sale, if accurate, would be the highest ever paid for a downtown Houston office building, and one of the two or three highest prices on a per-square-foot basis for Houston.

The timing for the development of BG Group Place turned out to be fortuitous, though it did not seem so in 2009. This good timing may not have occurred, however, if not for a sound financial foundation put in place from the start. Remarks Cover, “It is important to have a capital structure that allows you to weather some cycle risk. Having a lot of equity and a partner who could stay the course [was critical].” The high level of equity in the project also allowed the lenders to remain comfortable with the deal throughout the process, knowing that if they took the building back they would have a considerable loan-to-value cushion, offering a very safe position for them.

Transformative development can often unearth qualities not previously seen in a location. In hindsight, the corner of Main and Rusk streets seems like a jewel, now that the new building is in place, the blight has been removed, a new second light-rail line has been added, and new development is springing up nearby. But when the project was started, this transformation was not certain. Notes Cover, “BG Group Place resets the whole center of downtown.” That took both vision and an appetite for risk that has paid dividends to both the city and the investors.

For more ULI Case Studies, go to http://uli.org/publications/case-studies/.

Project Information

DEVELOPMENT TIMELINE
Planning started December 2006
Site purchased August 2007
Sales/leasing started February 2008
Construction started March 2008
KPMG leased signed May 2008
Construction loan finalized August 2008
BG Group lease signed October 2010
Project completed January 2011
BakerHosteltler lease signed December 2012
Building sold to Invesco May 2013
GROSS BUILDING AREA
Use
Office 1,000,000 sq ft
Retail 15,000 sq ft
Parking 550,000 sq ft
Total GBA 1,565,000 sq ft
Parking Spaces 1,120 spaces
LAND USE PLAN
Use Site area Percentage of site
Buildings 1.26 acres (55,000 sq ft) 100
Rooftop garden 20,000 sq ft
OFFICE INFORMATION
Office net rentable area (NRA) 960,000 sq ft
Floor size range 26,100–28,100 sq ft
NRA occupied 98%
Number of tenants 23
Typical tenant size 1–3 floors (35,000–75,000 sq ft)
Annual rents (sq ft) low $30s net/$50 gross
Average length of lease 12 years
Major office tenants NRA (sq ft)
BG Group 354,397
KPMG  101,938
BakerHostetler  80,046
Latham & Watkins  63,337
Citigroup  56,205
Reed Smith  53,714
Castleton Commodities 40,941
Kayne Anderson 35,341
RETAIL INFORMATION
Retail GLA occupied 100%
Annual rents (per sq ft) $28 net/$45 gross
Average length of lease 10 years
Key retail tenants Retail type GLA (sq ft)
Frost Bank Bank 11,000
Which Wich Deli $450,000
DEVELOPMENT COST INFORMATION
Site acquisition cost* $350–$400 per sq ft
Hard costs $175 million–$200 million
Soft costs
Architecture and engineering $11 million
Financing $20 million
Commissions $20 million
Other $70 million
Total $121 million
Total development cost $325 million–$350 million
*Involved both ground leases and fee-simple purchases.
FINANCING SOURCES
Construction financing 50%
JPMorgan Chase
Wells Fargo
Bank of America
BBVA Compass
Whitney Bank
Oklahoma Fidelity
Approximate total debt $162 million–$175 million
Development equity 50%
Hines CalPERS Green Development Fund
Approximate total equity $162 million–$175 million
Approximate total debt and equity $325 million–$350 million