On one Monday in April 2015, with former Mayor Julián Castro’s “Decade of Downtown” revitalization initiative at its halfway point, two announcements were made that seemed to kick the effort into a higher gear.
That day, the city of San Antonio reached an agreement with Frost Bank and developer Weston Urban on a deal that would result in the construction of the Frost Tower, the first office tower to be built downtown in more than 25 years.
Also on that day, Kevin Covey revealed that the then-unknown firm he led, GrayStreet Partners, had bought nine properties on East Houston Street, including historic gems such as the Kress and Vogue buildings. In an interview with the San Antonio Express-News, he announced his intention to invest between $150-$200 million to outfit them and his other downtown-area buildings with residential units, and office and retail space.
Nearly seven years later, the Frost Tower stands 23 stories tall in west downtown, a vital addition to San Antonio’s skyline.
Covey’s vision, on the other hand, has not worked out quite as planned, though there have been successes along the way. GrayStreet Partners has lately been selling off its East Houston Street assets as it shifts its focus, and its capital, to other projects—mainly, a partnership to redevelop the former Lone Star Brewery south of downtown at a cost of $596 million.
Entering the picture
GrayStreet Partners is not the first investor to struggle to carry out its vision for Houston Street.
The prior owner of the properties, Federal Realty Investment Trust of Rockville, Maryland, had purchased them in 1998. The next year, it worked with the city to create the Houston Street Tax Increment Reinvestment Zone (TIRZ) to help fund millions of dollars worth of public upgrades up and down the corridor, to complement its investment.
From 2000 to 2021, roughly $45 million in public dollars was pumped into projects on and around the street, including the Presa Street Bridge renovation near College Street with its easy access to the River Walk, and the creation of the courtyard next to Bohanan’s Prime Steaks and Seafood.
Yet the corridor has failed to achieve the vibrancy that leaders from the city and Federal Realty had imagined. Although there have been wins along the way, including GrayStreet’s own upgrades to some of the buildings, today, Houston Street remains mostly relegated to downtown workers and tourists. It’s worth noting that the attempt to revitalize Houston Street has been a group effort in recent years—most notably Geekdom, co-founded by Nick Longo and Graham Weston, as a catalyst for a still-growing tech district, and developer David Adelman’s renovations of the Burns office and Maverick apartment buildings.
When Federal Realty decided to sell its portfolio, San Antonio’s downtown leaders, including Mayor Ivy Taylor, expressed their wish that Federal Realty sell such as large portion of Houston Street to someone local.
They did, in GrayStreet Partners. At the time, Covey envisioned a rebirth of Houston Street, which, decades ago, had been San Antonio’s prime retail destination with the likes of iconic department stores Wolff & Marx, Frost Bros. and Neisner’s, among others. It has yet to happen.
Now, what was once a portfolio of properties has dissipated as GrayStreet Partners unloads them one by one.
A pandemic, and a tenant in trouble
Earlier this month, the real estate brokerage CBRE put the Kress and the adjoining Grant building—also known as the Children’s Museum building, which GrayStreet Partners went on to buy in 2016—up for sale. The firm had already reduced its ownership of them to a minority stake.
GrayStreet Partners had once hoped to transform the buildings into contemporary office space surrounding a food hall modeled off of the famous Mercado Roma in Mexico City. With a vine-draped courtyard and a rooftop penthouse lined with trees, it would have been the centerpiece of the firm’s redevelopment scheme for East Houston Street. In 2016, Covey said he was already negotiating leases with companies for the office space.
Yet the Grant and Kress buildings remain vacant, apart from the Texas de Brazil steakhouse on the ground floor, which was there when GrayStreet Partners purchased them. Covey, and Peter French, the firm’s director of development, declined to comment for this story.
Facade work on the buildings were due to receive $1.25 million in Houston Street TIRZ funding. Two years ago, city officials said the funding was not contingent on WeWork moving in.
When the buildings are sold, GrayStreet Partners’ presence on East Houston Street will be reduced to the two-story Schaum building and adjoined Frost Bros. and Bennett buildings, home to Bohanan’s, clustered together a block west of the Kress.
It will be a far cry from the firm’s presence in 2016, when it operated more than 300,000 square feet of office space in buildings on and around San Antonio’s most treasured urban thoroughfare.
It was a big deal for San Antonio’s fledgling tech district when the coworking company WeWork announced in 2019 that it would lease 75,000 square feet in the Kress and Grant buildings.
For years, the company had been aggressively buying and leasing real estate across the U.S. and the world, which it would then sublease to startups wanting access to flexible office space with modern amenities. It had multiple locations in Houston, Dallas-Fort Worth and Austin, but none in San Antonio.
GrayStreet proceeded with a $43 million renovation of the Kress and the Grant, joining them into one floor plan. The food hall was still part of the picture, expected to span 15,000 square feet, according to news reports.
[ Archive: Analysis: What’s to become of WeWork on Houston Street amid company turmoil? | Oct. 6, 2019 ]
In November 2019, a few months after the lease was announced, GrayStreet split its ownership of the buildings with Ovation Partners, a real estate firm from Austin.
Last year, the Heron asked Covey in an email why the firm had sold part of its stake. “We have limited capital,” he responded. “I recapitalize projects that we complete so that I can go do more.”
Filings with the U.S. Securities and Exchange Commission indicate that the new ownership entity—Kress OZB LLC—went on to have a securities offering. The latest corporate filing with the Texas Comptroller’s office lists 14 co-managers based in Austin, San Antonio, Denver and Los Angeles, GrayStreet among them.
Even when the lease was announced, WeWork was being battered with news reports about turmoil within the company, including erratic behavior by Adam Neumann, the CEO of its parent company We Company. In September 2019, he stepped down from the role. The company’s initial public offering was a failure.
The renovations were completed in March 2020, Covey told the Heron. In an email sent February of last year, he said that WeWork’s lease was still active. The company, and the unnamed operator of the food hall, had decided to postpone their opening to at least August 2021 due to the Covid-19 pandemic and its effect on San Antonio’s tourist industry, he said.
Yet the WeWork lease is now no longer active, and there are no current plans for a food hall, said Scott Herbold, a senior vice president at CBRE.
“There was tremendous momentum in 2018 and 2019 as they renovated the building and they had those leases going, but that was based on all the office tenants that would be there through the WeWork lease,” Herbold said in a phone interview. When the pandemic hit, “all that kind of dissipated,” he said.
The buildings have had their exteriors restored and have been outfitted with new windows, roofs and heating and air conditioning systems, he said. On the Kress, a large chunk of the wall facing Jefferson was punched out and replaced with contemporary-style windows. The buildings feature two rooftop terraces. In all, they include about 120,000 square feet of space, 10,000 of which is occupied by Texas de Brazil. The property for sale includes the 50-space parking lot at the corner of Houston and Jefferson streets.
Herbold has already given a few tours since the property hit the market on Tuesday, he said. More were scheduled for this week.
Successes on Houston, selling off properties
Since it opened in 2017 in the ground floor of the Vogue building, the La Panadería bakery has become a downtown retail staple. At lunchtime, the line at its counter often stretches to the front door as downtown workers wait to order from its long menu of sandwiches, soups and pan dulce. The bakery’s owners, brothers David and José Cáceres, grew up in Mexico City, where Covey spent part of his youth.
With an interior decorated in hardwood and tile, it’s just the kind of independent, thoughtfully-managed retail business that Covey has said he looks for to fill his constructions—see, for example, the retail center at the corner of St. Mary’s and Alamo streets in Southtown, which Covey owns, home to some of San Antonio’s most prominent restaurants in Pharm Table (chef Elizabeth Johnson) and Mixtli (Diego Galicia and Rico Torres), along with Brown Coffee Co., and others.
During its time as a landlord on Houston Street, GrayStreet has attracted major tenants such as Codeup, a coding bootcamp that has operated from the Vogue since shortly after the firm purchased the building in 2015, helping to spread San Antonio’s tech scene beyond Geekdom. After buying the nearby Travis Park Plaza office building that year, the firm leased space to tech companies such as EasyExpunctions. Covey also played a part in attracting the Hopscotch interactive art gallery and bar that is now in the building’s first floor and basement.
In 2017, Covey told the Express-News that GrayStreet had overhauled about 300,000 square feet of office space in its buildings on and around Houston Street—nothing to scoff at. By comparison, the Frost Tower has a total of 460,000 square feet of space.
The firm made the first sale of one of its Houston Street properties that year, when it sold the land on which the Hotel Valencia sits—but not the 12-story building itself, which had always been owned by the hotel—to a Houston investment company for $14.25 million.
GrayStreet would go on to sell Travis Park Plaza in March 2020, and the Vogue in December of that year. That month, it also sold its majority interest in the Walgreens building, 300 E. Houston St.
Covey told the Heron last year that he intended to hold on to the Bennett and Schaum buildings, which are fully occupied, according to CoStar, a real estate analytics firm. Among those tenants are Bohanan’s and the local offices of San Francisco architecture firm Gensler.
Some of GrayStreet’s most ambitious projects have not come to be. In the late 2010s, the firm drew up plans for a $560 million master-planned development named Broadway East on 14 acres of land it had purchased from the San Antonio Independent School District across Broadway from the Pearl. The pandemic had a “dramatic effect” on the project, leading the firm’s capital partner to pull out, Covey said last year. In August, the firm sold the land to locally-based Fulcrum Development.
Another plan to build a 20-story W Hotel on lower Broadway faltered due to difficulties raising capital and the Covid pandemic, Covey said. As of last year, the project was on hold, he said.
“Generally I would say we do sell real estate when we have completed something… but sometimes plans change,” he told the Heron last year.
[ Related: Pandemic derails GrayStreet Partner’s plans for Broadway East, delays W Hotel | Feb. 7, 2021 ]
The firm is now partnering with Midway, a development firm from Houston that specializes in projects done on a massive scale, to rehabilitate the former Lone Star Brewery at an estimated cost of $596 million. In May, City Council passed a $24 million incentive package to help it along.
Meanwhile, GrayStreet continues to buy new property: Earlier this month, it purchased a one-acre parking lot across the street from the Tower Life building from CPS Energy for $5.6 million.
“We do continue to believe in the urban core as a market to invest in and help forward,” Covey told the Heron. “We have been acquiring other projects and don’t plan on stopping.”
From our archive:
» Work begins on Houston Street food hall | Sept. 19, 2018
» Design firm Gensler settles into Houston Street, WeWork on the way | May 15, 2019
Richard Webner is a freelance journalist covering Austin and San Antonio, and a former San Antonio Express-News business reporter. Follow him at @RWebner on Twitter