Starwood eyes Marathon Oil Tower resi conversion

Starwood Property Trust wants to turn Houston’s Marathon Oil Tower into a residential property or sell it to a buyer who can make that conversion a reality.

The office-to-residential conversion trend is one that’s already underway in the Bayou City and other markets around the country.

The Greenwich, Connecticut-based REIT foreclosed on the 1.2 million-square-foot, 41-story office building at 5555 San Felipe in Houston’s Galleria-Uptown neighborhood, during the second quarter of 2022.

“We have an opportunity, hopefully to convert it to resi, sell it to somebody who’s going to do that.” Starwood CEO Barry Sternlicht told analysts on the company’s Nov. 9 third-quarter earnings call.

Starwood picked up 5555 San Felipe’s $50 million first mortgage and mezzanine loan and assumed a third-party $88 million mortgage on the property. Starwood paid about $102 per square foot for the tower. Space in the former headquarters of Marathon Oil can be leased currently for $24 to $25 per square foot.

Sternlicht gave some color to analysts during the call, as he described the building’s financial situation.

“One of the smartest investors in the world, a hedge fund based in Boston, a household name (the Baupost Group) in real estate, I think put in $100 million, and we had like $120 or $30 million loan, so we never really expected him to walk,” Sternlicht said.

Houston-based M-M Properties bought the tower in 2018 in a partnership with the Baupost Group for about $175 million, from CBRE Global Investors. CBRE bought it from Connecticut-based Hanover Real Estate Partners in 2013.

M-M renovated the property, which was built during the oil bust in 1983, adding pedestrian walkways, a fine-dining restaurant, a food hall, a coffee bar, communal work areas, a media wall and fitness center.

The renovations and improvements could stave off the back-to-back impacts of Houston’s 2018 office market decline, attributable to low oil prices, followed by the COVID-19 pandemic, which hastened the arrival of remote work and led big tenants to reduce their office footprints. The Bayou City has the most empty office space of any major U.S. city and subleases in Class A office buildings can be had at a 25 to 75 percent discount.

“I think it was like 100-something dollars a foot, which I laugh with our team, because I think if we took the steel down and sold that, we’d probably get $80 a foot back from just scrap metal costs,” Sternlicht said of the current value of the tower, once considered an icon of the Galleria-Uptown neighborhood.

Starwood considered leasing the top floor of the building to a big tenant, but the investment to further improve the tower wasn’t worth it to Sternlicht.

“We had an opportunity to lease the building to a significant extent, but it would have leased the top of the building and left us to lease the bottom,” Sternlicht said. “And if we do a lease as an office structure, we have to put up a mountain of (tenant improvements) for the tenant today. And I opted not to do that.”

Sternlicht said Starwood’s bottom would not significantly be impacted if the residential conversion doesn’t come to fruition.
“And we’ll see whether or not it takes place,” Sternlicht said. “But it’s not material in our book value. And hopefully, we’ll work it out.”