KBS Strategic Expands Houston Portfolio

If KBS Strategic Opportunity REIT's actions within the last week indicate anything, it's that the real estate investment concern is keen on Houston.

By Barbra Murray, Contributing Editor

If KBS Strategic Opportunity REIT Inc.’s actions within the last week indicate anything, it’s that the real estate investment concern is keen on Houston. The REIT just completed the $36.3 million acquisition of West Loop I & II in Bellaire, Texas, marking its second purchase in the Houston area this month. KBS Strategic bought the approximately 313,900-square-foot complex from Chase Merritt, which had owned the two buildings since 2007.

Everybody wants a piece of Houston right now, so the unencumbered West Loop buildings, located  practically a stone’s throw from the highly coveted Galleria submarket and the city’s central business district, hardly went unnoticed when commercial real estate and capital markets services provider HFF put the asset on the market on the seller’s behalf.

“We had quite a few bidders,” H. Dan Miller, senior managing director told Commercial Property Executive.  “There were a fair number of private capital buyers, value add-type players and opportunity funds. The value-add nature of the building is down the middle of the fairway for a whole lot of investors.”

West Loop I & II are not new kids on the block. Standing eight stories tall and featuring just over 169,500 square feet of leasable space, West Loop I made its debut in 1981, one year after the opening of the seven-story West Loop II, offering nearly 144,400 square feet. However, age is just a number and the office buildings and the nearly 1,000-space parking facility on the 5.6-acre site have been spruced up periodically over the years, with the previous owner having invested approximately $4 million in capital improvements.

The tenant roster, on the other hand, is in need of attention. The list of 52 occupants, which includes BBC (USA) and tech companies The Rand Group and Bridgeway Software, accounts for just 77 percent of the office space, as detailed in a recently filed SEC document.  However, with the current weighted-average remaining lease term in the building at approximately 3.3 years and the weighted-average annual rental rate over the remaining lease term at $21.06 per square-foot, the only way to go is up. As noted in a third quarter report by HFF, the average quoted rental rate in Houston has fully recovered and surpassed the previous peak seen in 2008.

“The metro Houston market had a positive 860,000 square feet of absorption, overall vacancy is 10.9 percent and average asking rates are up 2.4 percent,” Jeff Rader, VP of KBS Capital Advisors L.L.C., the entity that advises KBS Strategic, told CPE. “These stats, along with a limited pipeline, point to landlord favorable conditions for the remainder of 2012 and into 2013.”

Houston’s office-market upswing has everything to do with employment. According to research by housing market information provider Metrostudy, Greater Houston’s status as one of the top job growth markets in the country continues, with the area having added 89,500 positions in the trailing 12 months ending in August 2012. Investors are salivating.

“Office sales are all driven on job growth and our three economic drivers are the Texas Medical Center, which is the largest medical center in the world, the oil and gas business and then the Port [of Houston], which is the number one export port in the country,” HFF’s Miller said. “We’ve got a lot of positive things going on. We’ve got the fastest growing economy in North America, as the Brookings Institution ranked us.”

With the acquisition of West Loop I & II and the $68.5 million purchase of the 400,100-square-foot 1800 West Loop South earlier this month, KBS Strategic has established a 714,000-square-foot office presence in Houston in a matter of just days. But the REIT is only getting started.

“The number of buildings going to market has increased significantly since 2011 and the trend is expected to continue going into 2013,” Rader said. “While we are not at liberty to discuss prospective transactions, this market is certainly one of the key markets on our radar.”

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