Real estate development in the fourth largest city in the United States has gone back to the basics — the three "Rs" of renovation, redevelopment and refurbishment. Entrepreneurs in the metropolis known around the world for its sleek skyline dotted with futuristic buildings, such as the trapezoid-shaped Pennzoil Place and the cathedral-like Bank of America Center, have discovered that new is not necessarily better.
Instead, in a place that prided itself for knocking down the old to make way for the new, real estate developers and builders have opted for the old. Renovation, redevelopment and refurbishment have become a major driving force. Consider the following trends:
• Downtown is not dead. After decades of sleepiness, Houston’s central business district (CBD) has emerged as a major center of commercial, retail, restaurant, residential and entertainment redevelopment. Even though several new skyscrapers are under construction, many builders have turned their attention to pre-existing structures. By giving these buildings a new lease on life, these impresarios understand that increasing numbers of companies and individuals now seek special touches such as arched windows, hardwood floors, high ceilings and brick exteriors — amenities that are adding to the value of real estate once thought to be worthless.
• Location still matters. Renowned retail redeveloper E. D. Wulfe is transforming the 750,0000 sq. ft. Gulfgate Mall, which opened in the 1950s but has since deteriorated, into a retail showplace that is expected to spur refurbishment throughout the South Loop East neighborhood. Houston Mayor Lee P. Brown said, "It is anticipated that the Gulfgate project will serve as a catalyst for the commercial and residential redevelopment in the entire areas."
•Old can become new. In the city’s trendy Galleria area, the dilapidated former Tenneco Building has been reborn. Locally based TMPC Realty Corp. has carefully revamped the structure, which sat like a white elephant for a decade. The twin towers were stripped down and rebuilt, with expanded floor plans and curtain wall construction starting from the shell. Now dubbed Park Towers, the 540,000-sq. ft. Class-A structure at the Loop and Post Oak Boulevard has become a sought-after leasing location.
"There is a growing appreciation of Houston’s past and the fact that many of the buildings and developments that have been neglected could be given a new lease on life," said developer E.D. Wulfe. He worked his magic on the Meyerland Shopping Center, transforming that project into an award-winning, highly trafficked retail location. "It not only has to do with changing the area, but bringing the value to the bottom line. Economically, renovation works."
Will Penland, senior managing director in the Galleria office of CB Richard Ellis, agrees. He notes that the three rules of real estate — location, location, location — have spurred the renovation trend.
"You have obsolete buildings in great locations that couldn't generate the type of rents newer buildings can," he explained. "By renovating them, owners can increase their revenues."
Much of the renovation and redevelopment in the city is occurring in the CBD, Penland added, because that’s where most older buildings are located. "In downtown Houston there is the Cotton Exchange building, which has been renovated; the Rice Hotel, which has been turned into lofts; and the Texaco building, which is going residential," Penland said. "Will the renovation trend continue? Yes. I think it will because there is increasing demand for renovated residences and office space."
There are other reasons for the rush to renovate in Space City. John S. Dailey, senior vice president and director of investment services at Houston-based PM Realty Group, noted that "for too long, we sat on our hands. Back in the 1970s, this city had the perception of being a futuristic new world with its impressive new buildings, its space technology, the booming oil business and the eighth wonder of the world, the Astrodome. People flocked to Houston, seeing it as the land of opportunity. It was considered the new home of futuristic America," he said.
Bust back to boom
But then came the 1980s bust. "Everything hit at once, and the city became a symbol for lost wealth," Dailey added. "We sat still in the 1990s, trying to make do with what we had. Now we’re rebuilding from within."
Houston also has sought to become a 24/7 city, Dailey said. Houstonians now want to live downtown, a place were residents used to joke that the sidewalks were rolled up at 6 p.m. No more. Many say Houston’s CBD intensified the three-"R" trend by converting once derelict buildings to trendy and luxurious residences and offices. Redeveloper Randall Davis, for instance, is generally credited with being a catalyst for the redevelopment of downtown’s once grand buildings.
Davis, in partnership with Atlanta-based Post Properties, transformed the derelict Rice Hotel into 312 luxurious lofts. He is now taking on the 220 Main building, which was constructed in 1911, as another refurbishment project. He also is redeveloping the old S. H. Kress building at 705 Main Street into a 107-unit multifamily project called the St. Germain.
Davis is not alone. Spire Realty has redeveloped an estimated 1 million sq. ft. of retail, office and residential space in the CBD. Spire’s projects include the 4-story, 23,000 sq. ft. Cotton Exchange Building at 202 Travis, an historical landmark built in 1884, and the 10-story Southern Pacific Railroad structure at Travis and Franklin.
Spire has transformed the Southern Pacific structure into the 107-unit Bayou Lofts, with retail space on the first floor. Spire also is redeveloping 501 Main, a 130,000 sq. ft. building with first-floor retail and office space.
One of the most eagerly anticipated projects is the $70 million renovation of downtown’s Commerce Building into 120 upscale residences, a project of New York-based investment group Premier Towers. Units at the two-tower complex are priced in the $200,000 to multi-million dollar range.
Tom Fish, managing director for the southwest region of locally based L.J. Melody, concurs that Houston is experiencing a surge in renovation and redevelopment. Fish said multifamily and office properties are receiving the most attention, "whether it is taking an old building and retrofitting it downtown, or changing a property from office/warehouse use to residential or taking an older apartment complex and making it newer."
"I think we’re going to see more of it because land prices have gone through the roof, and as those land prices have gone up, it is making it increasingly difficult to build from the ground up for any decent type of return," he said. "People are looking at renovation as a way of upgrading the product to get higher rents."
Fish added that the spread between rents of existing older product and brand new product is getting wider, allowing owners to renovate a property and then take advantage of that gap.
Also driving the downtown renovation boom has been a number of major entertainment projects including Bayou Place, a redevelopment of the former Albert Thomas Convention Center. Thanks to a $23 million renovation, Bayou Place has become one of downtown Houston’s entertainment centers, boasting a Hard Rock Café, an Angelika Film Center & Café and numerous other restaurants and clubs.
Currently, the CBD’s former Music Hall complex is undergoing an $88 million transformation. Slated to open in 2002, it will become the Hobby Center for the Performing Arts. The venue will include the 2,650-seat Sarofim Hall, home to Theatre Under the Stars and the Houston Broadway Series.
A redevelopment on the city’s east side has produced the 40,950-seat Enron Field, a $265 million baseball stadium that is home to the Houston Astros and that features a life-size, real locomotive stream engine. Nearby, the vacant World Trade Center is under contract to restauranteur Tillman Fertitta, chairman of Landry’s Seafood. Fertitta says he plans a 200-room hotel if the market maintains its momentum.
Renovation, redevelopment and refurbishment are particularly hot trends in the multifamily sector, not just downtown. Don McClain, president of Advantage Capital Funding, a commercial debt and equity provider for commercial transactions, said the sector is seeing an increase in Class-C renovation projects.
"Right now, we’re helping a group that is doing a Class-C renovation project," he said. "Class-C is now stronger than Class-A. It used to be that you could pick up a unit for $10,000 to $15,000, but now you can’t touch one for less than $20,000 because developers are going in and rehabbing them."
In addition, a number of entities are buying older properties, renovating them and converting them into condominiums, McClain said.
Retail also is ripe for refurbishment. Dallas-based Trammell Crow Co. (TCC) recently completed the transformation of the West U Market Place Shopping Center constructed in 1949. The center has been renovated back to its former art-deco style, with the theater’s neon icons, which were previously so prominent for the property, undergoing preservation, noted Alan Hassenflu, managing director of TCC’s retail division.
Houston’s east side is also the site of major retail renovations. Developer Wulfe is working his magic on the $50 million redevelopment of Gulfgate. But Wulfe, who purchased the property for $8 million several years ago, doesn’t see his job as merely tearing down outdated stores and signing up new tenants.
"Our challenge is not just to redevelop this mall, but to serve as a catalyst for revitalizing the neighborhood," he said. "The reborn center could breathe new life into the mostly Hispanic neighborhood surrounding Gulfgate."
Wulfe has announced two major tenants for the once moribund mall: a 163,000-sq. ft. Lowe’s and an 80,000-sq. ft. H-E-B Pantry grocery store. The addition of Lowe’s represents westward expansion of Gulfgate, which will now span both sides of Woodbridge Drive. "We decided to expand by acquiring 24 acres of land on the west side of Woodbridge to make a bigger statement and a bigger retail environment," Wulfe said.
From the north of the city to the south, from Houston’s east end to the west, Houston developers are practicing the three "Rs." Today, there is a growing appreciation of Houston’s past, and a realization that neglected lemons of buildings can be made into lemonade. Aging, once forgotten structures are no longer scoffed at. Instead, they are looked upon as opportunities for real estate entrepreneurs who have never forgotten the three maxims of real estate: "Location, location, location."
— Contributing editor Mike Sheridan is a Houston-based writer