Record real estate purchase signals big bet on region.
Thursday, March 29, 2007
With its pending purchase of Frost Bank Tower and nine other Austin office properties, Thomas Properties Group Inc. is making a big bet on a region where it wants to plant its flag for the long haul.
The $1.15 billion contract to buy some of the most prominent buildings in Austin, announced Wednesday, is believed to be the biggest commercial real estate deal in Texas history. It's also Thomas' biggest deal ever.
"We believe this is a truly extraordinary opportunity for our company and our investment partners," said James Thomas, the company's founder, chairman and chief executive. "Austin is expected to exhibit the strongest job growth in the nation over the next five years, and this portfolio is well-positioned to benefit from that growth."
Thomas, a 10-year-old company known for its high-profile properties and projects, is buying the Austin portfolio from Blackstone Real Estate Advisors.
Thomas executives say Austin's skilled workforce, moderate cost of living and attractive quality of life make it a highly desirable place for companies to do business — companies whose workers fill office space. The executives say their firm has long-range designs on Austin, with no plans to flip its new holdings.
Like Northern Virginia and Silicon Valley, Austin is "attracting the brightest and the newest of companies, including biotech and high-tech, and some of the best and brightest people," said John Sischo, one of Thomas Properties' three executive vice presidents.
"It's typical for me to run into folks that are born in Texas, and elsewhere, that say they want to be in Austin for its quality of life," Sischo said.
The company has had its eyes on Austin since late 2005, when it bought the 333-acre Four Points Centre in Northwest Austin. Thomas has broken ground there on a three-building office complex that will have a total of 265,000 square feet.
Eventually, the site could include more than a million square feet of office space and a hotel.
Owning some of the premier buildings in downtown Austin is key to the company's expansion plans, Sischo said. Those plans are expected to include future office and residential developments.
Thomas executives like what they say is Austin's "forward-thinking" approach, including plans for commuter rail and efforts to stem sprawl by encouraging dense development downtown.
"That's being enlightened about what a city has to be as it develops out," Sischo said. "Most cities this size have a very difficult time recognizing that's what's happening. You are ahead of the curve."
Thomas Properties owns or manages a portfolio of about 15.5 million square feet of real estate in the U.S., with properties in Houston, the Philadelphia area, Los Angeles and other California cities.
The company has been increasing its Texas holdings since mid-2005.
One of its largest and highest-profile projects is in Los Angeles County, where it is leading a team proposing a $3 billion expansion to Universal City that would add about 3,000 residences as well as offices and retail.
Thomas Properties was founded in 1996 and went public in 2004. Its biggest Texas acquisition before this one was in 2006, when it paid $295 million for BMC Software's corporate headquarters campus and 24 adjacent acres in Houston.
In the 1980s, Thomas and a former business partner developed some of Los Angeles' highest-profile offices, including the U.S. Bank Tower, the tallest building in the West.
In Austin, Thomas' portfolio would include the city's two newest downtown skyscrapers, the Frost Bank Tower and 300 West Sixth.
Although Thomas isn't disclosing what it is paying for individual buildings, Equity Office Properties Trust paid $188 million for Frost Bank Tower in 2006, which worked out to $354 a square foot — a Texas record.
Thomas Properties' Austin portfolio is 82 percent leased overall.
Local real estate experts say the company is in a position to command top rents for its properties, given that it controls more than half of the top-flight office space downtown.
Sischo declined to discuss future rental rates.
Once the sale closes, in about 60 days, Thomas will be Austin's biggest office landlord, with about 3.5 million square feet of space.
The purchase comes amid a strong office market in Austin, where rents for first-class space citywide climbed about 18 percent from 2005 to 2006.
Blackstone, a private equity firm, snapped up the Austin properties last year when it bought Equity, a national real estate company, for $39.2 billion in cash and debt.
The deal included top office portfolios around the country. Since buying Equity, Blackstone has been flipping its holdings in Boston, Seattle, San Diego and other cities, often for premium prices.
Blackstone hired Holliday Fenoglio Fowler LP to market the Austin properties and drew interest from several companies. The deal was among the top five for Holliday Fenoglio.
Austin office rents have been lower than many other major cities, but that is changing, said Tim Hendricks, senior vice president in the Austin office of Cousins Properties Inc., which built and manages the 33-story Frost Tower.
"Going forward, we'll be closing the rental-rate gap between Austin and areas like California and the East Coast," Hendricks said.
Even with anticipated increases, he said, "Austin is still a great value."
However, he said many downtown tenants will be protected from anticipated increases because their leases don't expire until between 2009 and 2014.
Local brokers will be watching how Thomas' operating style differs from that of Equity, said Sam Houston, the office division project partner at HPI Real Estate Services and Investments Inc., formerly Hill Partners.
"I am guessing that Thomas Properties will bring a different culture and style of doing business to Austin, and it will be interesting to see how that impacts the market," Houston said.
Another big deal is coming: Crescent Real Estate Equities Co. has put its Austin holdings on the market.
The Fort Worth-based company has already sold one element, the Omni Austin Hotel, which was part of a package deal with six other properties in other cities for $550 million.
By Shonda Novak
AMERICAN-STATESMAN STAFF
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