A mountain in commercial real estate, Hines is NREI's Office Developr of the Year

About 42 years ago Gerald D. Hines decided to help a neighbor develop a small warehouse building in Houston as a side project to a career as an engineering consultant.

With a couple of developments behind him in the late 1950s, destiny steered Gerald Hines down a new path.

"After completing the first project, I did a second and then went on from there," Hines, the $9 billion company's founder and chairman, remembers. "My real estate business soon proved more interesting to me than my engineering career, so I started my own real estate business."

That lone seed of a warehouse led to the formation of one of the most successful real estate companies in the world, Houston-based Hines, NREI's Office Developer of the Year for the second year in a row.

In 1998, Hines had 18.28 million sq. ft. of office space under development, doubling its 1997 total and outpacing NREI's next leading developer on the 1998 list, Minneapolis-based the Opus Group, by more than 7 million sq. ft.

Across the United States and across the globe, Hines tackled projects like the massive 4 million sq. ft. Diagonal Mar mixed used development in Barcelona, Spain, urban core projects like the renovation of the San Francisco Civic Center and suburban/edge city developments like Dallas' Galleria North, an 800,000 sq. ft. mixed-use endeavor.

For Hines, the development spree over the last two years is only the beginning. In the late '80s and early 1990s, the company looked abroad and bought properties in a depressed domestic market. As U.S. commercial real estate markets rebounded and European and emerging market development opportunities arose, Hines worked with a U.S. pension fund to generate $280 million in equity for developing corporate properties and also created the company's U.S. Office Development Fund with $320 million in equity to invest about $800 million in suburban multi-tenant properties with stable demand. Both funds complement Hines/Dean Witter/ TCW's $410 million emerging markets fund created in 1997. The company will launch its second emerging markets fund this year.

Overall, Hines plans to develop as much as $1.1 billion in Class-A office space over the next three to five years, company President Jeffrey C. Hines says.

"It really was market driven," the company president says. "Going back two years ago a lot of the markets looked ready for development. Job growth in so many cities outstripped everyone's expectations.

"We were ready for development much faster than we would have predicted. It was a very pleasant surprise."

Concerns allayed While Hines undertakes ambitious developments in smoldering markets like San Francisco, with the Civic Center renovation and development plans for suburban core projects near the airport and control of a one acre site at 562 Mission St.; Minneapolis, with the 645,000 sq. ft. 50 South Six office building that is 60 % preleased five months before construction began; and Boston, where the company recently bought a 91-acre suburban development site and plans a 2.1 million sq. ft. mixed-use development integrated with the city's South Station Transportation Center, Hines also has big plans in Sunbelt markets Dallas and Atlanta that are rife with uncertainty.

Hines owns and manages the hotel and retail portions of Dallas' Galleria, and broke ground on Galleria North in December. A three-phase project, Galleria North will contain about 700,000 sq. ft. of office space with an additional 112,000 sq. ft. of upscale retail space. Tenet Health Systems has signed an agreement to occupy the entire phase one building.

Hines' Overton Park near Atlanta's Galleria area is a 33-acre, 2.1 million sq. ft. high rise development that also includes residential and retail.

Hines expects strong demand based on location and quality. Overton Park is at the junction of Interstate 75 and I-285, while the north Dallas Galleria fits perfectly into Hines' quest to build in distinctive suburban markets with steady demand.

"There are always concerns about overbuilding. However, the current financial situation in the U.S. has put some of our competitors' projects on hold - especially those with marginal locations," Gerald Hines says. "We watch our markets closely and we would not proceed without significant pre-leasing. We think both the Galleria North and Overton Park locations are exceptional, and the clients in both markets have indicated that they would be very pleased in a quality development in those locations.

"We won't be proceeding with Overton without a major tenant commitment, but we think it's the best location in Atlanta and we fully expect to proceed with it."

The Hines agree that the company escaped the late 1998 capital markets collapse relatively unscathed for a number of reasons, primarily capital sources like the U.S. Office Development Fund were not affected and Hines' successful track record makes it easier to acquire debt financing.

Capital market woes and their effect on demand are a greater concern.

"We are noting some softness in the leasing markets in some cities, but we think our projects will be able to capture their fair share of tenants due to the prime locations and quality of the properties," Gerald Hines says.

"Demand is the big question," Jeff Hines says. "Demand is already showing more positive signs than people anticipated. We think as long as the demand side holds up, the fact that the credit crunch is going to cut back on a lot of the supply could, in the end, be a positive factor."

No borders Hines operates offices from Beijing to Munich, and one of the company's biggest developments, Diagonal Mar in Barcelona, could be called the company's European centerpiece.

The company bought the 84-acre property - and assumed major zoning risk - after another developer gave up on the beachfront site near the 1992 Olympic Village. With Gerald Hines personally managing the project, Diagonal Mar's first phase consists of nearly 1 million sq. ft. of retail and entertainment space that will open in 2000. Subsequent phases include office, hotel and about 2,000 units of multifamily housing.

"It's quite a site to see," Jeff Hines says. "To find that kind of site in a European city is unheard of."

In 1998, privately held Hines made its presence felt in Mexico City, buying the Reforma 350 building at one of Mexico's prime locations at the plaza of the Angel of Independence. The company financed the acquisition through its Emerging Market Fund and plans to spend $23 million renovating the 330,000 sq. ft., 1980's vintage office building to Class-AAA quality. Hines also completed the final phase of the Del Bosque development, an 800,000 sq. ft. mixed use project in Mexico City's Polanco district that is home to The Coca-Cola Co.'s Latin American headquarters.

Back across the pond, this year Hines will start a 40-story, 700,000 sq. ft. office tower in Paris' La Defense business district. The building has already been sold to a joint venture of Caisse des Depots & Consignations and Electricite de France, which will occupy 430,000 sq. ft. Continuing Hines tradition of working with world-class architectural firms, Pei Cobb Freed & Partners won the international competition to design the Paris building.

Diagonal Mar and the La Defense building are part of a wider European picture that includes emerging markets like Warsaw and Moscow. Though it's often arduous, Hines intends to enter a new market, whether emerging or more static, every two to three years.

"We are looking at additional opportunities in Europe," Gerald Hines says. "All foreign markets are difficult and require careful analysis and alignment with the right local partners who understand the local market, local politics and local customs. We move cautiously, often getting our feet wet with fee-based opportunities that limit our risk.

"The barriers to entry are great, but we are committed to expansion."

International expansion adds diversification from a market and financing standpoint, but Jeff Hines admits that if the company looked at international expansion on a short-term basis, it probably wouldn't be worth it. Once again, demand for quality drives Hines' international strategy.

"Long-term, we think there are benefits for us to be one of what we think will be a small handful of truly global players on the real estate side," Jeff Hines says. "We're not in it for short-term opportunity. Our intent is to go into these international markets and serve the client we know best, your international/multi-national corporation who tends to be our client in the U.S.

"We don't plan to go to Beijing and compete with local developers for local tenants. We plan to go to Beijing and serve the IBMs of the world."

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