Dhanani Private Equity buys Galleria Park in Houston

Private Equity
December 30, 2022
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At first blush, an office property less than 30 percent occupied in a city struggling to fill an expanding pandemic-era pool of excess office may not seem like an obvious choice for investment. But Dhanani Private Equity Group sees it as an opportunity.

The Houston-area real estate firm, which typically focuses on suburban properties, is leaping into the urban market for the first time with the purchase of a roughly 400,000-square-foot office and retail complex in the Galleria/Uptown area. An entity tied to California-based Acore Capital sold the complex, called Galleria Park, which includes two office buildings and retail space with a P.F. Chang’s restaurant at the corners of Westheimer and Sage Roads, in late December.

The deal is an example of how some investors are willing to take a risk on Houston office, particularly for well-maintained properties in desirable locations.

Even though Houston’s office market is chronically challenged by high vacancy rates and the rise of remote work, real estate investors returned to deal making in the past year after a lull during the pandemic. Over roughly the past year, there have been an estimated $5.8 billion in office deals in the Houston region, according to commercial real estate data firm CoStar. That is more than double the deal volume seen over the same period a year earlier, when total office deal volume reached $2.5 billion. At the same time, the vacancy rate for Class A office space in the Galleria market is about 27 percent, compared to the regional average of about 20.5 percent, according to real estate firm Transwestern.

“Given the uncertainty over the near-term leasing environment, investors in Houston are favoring deals with minimal leasing risk and stable cash flows and continue to pay above market pricing for certain newer assets leased to credit tenants,” said Itziar Aguirre, director of market analytics at CoStar. “I expect this trend will continue into next year.”

Office properties are trading for an average of about $292 per a square foot for Class A building across the Houston region, according to CoStar, which did not including medical office space in its calculations.

Dhanani picked up Galleria Park for far below that average, though, said Nick Dhanani, its CEO. Although the price wasn’t disclosed, Dhanani said the firm paid significantly below the land value of the property, which he estimates was about $62 million. It was also about 75 percent below the replacement costs for the building, he said.

“Galleria Park is the first significant office transaction to close [in Houston] since interest rates began to significantly rise in April/May and shows investor commitment to efficient, well-located office buildings despite the new hybrid work environment,” Marty Hogan of JLL, who marketed the property for sale along with JLL’s Rick Goings, Ryan Olive, Bailey Black and Susan Hill, said in an email.

Dhanani said his firm is negotiating for a 10,000-square-foot high-end steakhouse and an upscale sushi concept in the building. If those deals come through the restaurants would join a relatively new location for P.F. Chang’s there.

To attract more tenants to the 260,000 square feet of vacant office space, Dhanani plans to charge rents about 25 percent below Galleria area market rates. Average annual asking rents for Class A space in the West Loop area were nearly $37 per square foot in the third quarter, according to research from real estate firm Transwestern. (Transwestern will be handling leasing at Galliera Park.)

Dhanani said he can afford discounted rents because of the relatively good price he got on the property and the fact that it has been fairly well maintained. Prior owners poured about $15 million into upgrading the 1970s-era buildings since 2015, according to JLL marketing materials. The campus includes about 10,000 square feet of recreation space, including an outdoor area with mature live oak trees and a 3,700-square-foot fitness center.

“This is our first trophy asset in the Galleria market and it’s an institutional-quality asset, which for a small company like us, we’ll be holding it and we’re proud of that,” said Dhanani.

Dhanani Private Equity, which is relocating its headquarters Sugar Land to Stafford in January, has been expanding its holdings in the Houston region. The firm also recently acquired 50 acres off U.S. 59 and University Boulevard in Sugar Land for a proposed mixed-use development next to the Smart Financial Centre concert hall.

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