Austin’s Heat Attracts Big Investors

It may not have the cachet of New York City or Washington, D.C., but the Austin office market has remained a hot one for investors.

Frost Bank Tower was part of TPG/CalSTRS Austin L.L.C.’s 3 million-square-foot portfolio acquisition.

It may not have the cachet of New York City or Washington, D.C., but the Austin office market has remained a hot one for investors. Nonetheless, they did a double take when Thomas Properties Group Inc. and California State Teachers’ Retirement System announced they had partnered on the acquisition of a 3 million-square-foot portfolio in the city. The joint venture, TPG/CalSTRS Austin L.L.C., bought the assets from a JV led by Lehman Brothers Holdings Inc. in a transaction valued at $859 million, including the assumption of $626 million in existing debt.

Five of the assets are located downtown, including the 535,000-square-foot Frost Bank Tower, which, with its striking architecture, is known by sight to a great percentage of Austin dwellers. The other downtown assets are the approximately 454,200-square-foot tower at 300 W. Sixth St.; the 504,000-square-foot One American Center; San Jacinto Center, offering 410,200 square feet; and One Congress Plaza, a 518,400-square-foot high-rise. Those are just the downtown digs; three suburban properties in Northwest Austin round out the collection. The 175,500-square-foot Westech 360 is part of the group that sits outside the central business district, as are Park Centre and Great Hills Plaza, featuring a respective 203,200 and 139,300 square feet of premier office space.

TPG and CalSTRS are not new to the charms of the Austin office market. Operating jointly as TPG/CalSTRS L.L.C., they had owned a 25 percent interest in the office properties since 2007 as part of TPG-Austin Portfolio Syndication Partners, a venture in which Lehman Brothers Holdings Inc. held a 50 percent share and an offshore sovereign wealth fund owned the remaining 25 percent stake.

Madison International Realty has an eye on the city, and to that end entered into an agreement for an affiliate to acquire a one-third interest in the TPG subsidiary that owns the interest in TPG/CalSTRS Austin.

“The properties represent an opportunity to invest in a demographically compelling market with low labor costs, job growth and office market absorption,” Ronald Dickerman, founder & president of Madison, told Commercial Property Executive. Unemployment dropped to 5.9 percent in August, compared to 7 percent for the state of Texas and 8.2 for the United States, according to the U.S. Bureau of Labor Statistics. And Jones Lang LaSalle Inc. lists the office vacancy rate at 15.2 percent in metropolitan Austin in the third quarter, a notable decline from the 20.2 percent vacancy rate in the third quarter of 2011.

“It’s just such a desirable place to live, so for several years now you have had more mid-level and smaller companies that continue to want to relocate, and I think it’s employee driven as much as it is company driven,” observed Brian Cheek, managing director with Newmark Grubb Knight Frank. “People want to be there.”