It was GrayStreet Partners' biggest project yet. In 2017, the firm bought 14 acres of warehouses and bus yards from the San Antonio Independent School District on a coveted site across Broadway from the Pearl.
There, it would build a whole urban district from scratch, much as had been done at the Pearl: Broadway East, a collection of offices, apartments, restaurants and parks with a staggering price tag of $560 million.
The firm released splashy renderings, went through the arduous process of having the properties rezoned, applied for $8.9 million in public incentives, and met with residents of the adjacent neighborhood, Government Hill, to court their support, insisting in public meetings that it would be a long-term owner of the development.
Then GrayStreet changed its mind. Last month, it put the land back on the market.
Led by financial whiz Kevin Covey, who seemed capable of summoning limitless investment dollars for his downtown dreams, GrayStreet once seemed to have a bottomless appetite for construction projects. But the firm has lately been selling many of the properties that it assembled in its acquisition spree during the mid-2010s, which was fueled by taking on at least $172 million of bank debt and partnering with investors such as Andrew Sarofim of the billionaire Sarofim family of Houston, according to county property records and state corporate filings.
Last year, it sold Travis Park Plaza, and the Vogue and Walgreens buildings, two parcels in the row of historic mid-rises it had bought on Houston Street in 2015. In fall 2019, it split its ownership of the Kress building—another of the Houston Street properties—with two Austin firms: Ovation Partners and McDonald Development Group. The Kress and neighboring Grant buildings were being modified into a modern shared office space for national brand WeWork, and into a food hall, respectively.
Reached by email, Covey said that the Covid pandemic had had a "dramatic effect" on GrayStreet's plans for Broadway East. The firm had been pursuing a partnership with a "large regional pension fund" which would have provided all the capital for its development, but the fund pulled out of the project, he said.
GrayStreet typically waits until it has completed a project to sell it, "but sometimes plans change," Covey said.
"I'm sorry that some of these didn't pan out, but I can assure you no one spent more time or money on this than we did and are very sorry to see it not happen under our watch," he said.
Many of the properties which GrayStreet has sold in recent years have indeed been completed. The Vogue building is 87.8% occupied, according to Yesenia Marili, vice president of marketing and research for real estate company Transwestern. In fall 2019, GrayStreet sold the building it had developed at 201 E. Grayson St., across from the Pearl, which is now home to high-end furniture store West Elm.
In the case of Travis Park Plaza, the firm made a profit when it sold the building in February 2020 to Entrada Partners of Los Angeles, Covey said. It had borrowed $34.7 million from two banks to buy and rehabilitate the property, county records show.
Last year, GrayStreet made a significant acquisition when it bought the Lone Star Brewery out of bankruptcy for $14.5 million. The brewery has long served as something of a trap for investors: Many have seen great potential in the 32-acre site, on the River Walk near Southtown, but no one has been able to develop it. At least four attempts have failed since the brewery shut down in 1996.
GrayStreet conceived of its plan for the brewery after Covid began to spread, so the pandemic is factored into the business plan, Covey said.
"We do continue to believe in the urban core as a market to invest in and help forward," he said. "We have been acquiring other projects and don't plan on stopping."
Many of GrayStreet's construction projects have lagged far behind schedule. The Light building, which was supposed to have been completed by the end of 2019, is still under construction. The firm ran into structural issues in the Print building, adjacent to the Light, causing a 16-month delay, Covey said.
The building's first tenant—the architecture firm Ford, Powell & Carson—will move in before the end of this month, Covey said. The San Antonio Express-News has signed a letter of intent to move in as it sells its longtime headquarters a block away. The Print building is scheduled to be finished in July, Covey said.
Since 2018, GrayStreet has had plans to build a 20-story tower on lower Broadway with offices and a hotel operating under Marriott's W Hotel banner. The hotel was projected to open in January of next year, but it has not yet broken ground.
That project has been delayed because it took longer than expected to raise equity capital, Covey said.
"Unfortunately it pushed the project back enough that Covid eliminated the debt market for new office and hotel development," he said.
The project is on hold "until the debt markets come back," he said.
WeWork, a real estate startup, signed a lease to occupy 75,000 square feet in the Kress and the adjoining Grant building and was at one point scheduled to move in early last year. The company ran into turmoil after a failed initial public offering, leading to the ouster of its CEO. Ovation, the firm from Austin, is now trying to let WeWork out of the lease and recruit other tenants in its place, Covey said.
Renovation work on the Kress and Grant buildings is mostly completed, Covey said. The buildings have no tenants, said Ryan Harrison of Freestone Commercial Real Estate, who is leasing them.
GrayStreet had its eye on Government Hill as early as 2015, when it started buying properties on the east side of Broadway. Across the street, the Pearl was booming. Its developer, Silver Ventures, was building the Cellars apartment tower, and would soon reveal plans for the Credit Human office tower on Broadway.
The properties didn't amount to much—a law office, a hunting supply store—until in 2017, when GrayStreet exploded their potential by buying the 14 acres from SAISD.
The purchase was a masterstroke: GrayStreet now had a rare opportunity to build an urban community from scratch, capitalizing on the growth of downtown and the Pearl. Everyone expected something ambitious, and the firm didn't disappoint, releasing renderings of high-rise buildings surrounding a public plaza. The community would include 1.6 million square feet of mixed-use space, development director Peter French said last fall.
Midway, a development firm from Houston, was partnering with GrayStreet on the project, and is still a partner on the Lone Star Brewery. Larry Sloan, Midway's executive vice president of investments and development, said it is "engaged in an extensive master planning effort" and remains interested in the site.
Another partner on the project was Andrew Sarofim, the son of Fayez Sarofim, nicknamed "The Sphinx," who has built a $1.4 billion fortune from lucrative investments in companies such as the energy pipeline firm Kinder Morgan, according to Forbes. Andrew Sarofim has also partnered with GrayStreet on the Light building, and has invested in some of the firm's other projects, he said in a brief phone call.
"We just did what we, or he, felt was best," Sarofim said about Covey. "The market has changed from when the concept first came to light, and I'm sure that whoever takes it on next will develop it for the community."
GrayStreet could have hung onto the Broadway East properties, Covey said, but it believed that the project would be built faster if it sold the site to a developer capable of starting work soon.
Standing between the Pearl, downtown and Fort Sam Houston, Government Hill is one of San Antonio's oldest neighborhoods, full of pre-war bungalows and Victorian mansions. Its residents say they treasure the neighborhood's diversity and its deep-rooted history. Though it's right across Interstate 35 from downtown, it has managed to preserve a quiet character, they say. Many of its homes have been in the same family for decades.
There is a belief among some residents that developers are preying upon the neighborhood, with the city's help; they point to instances in which large numbers of townhomes were built on small lots between single-family homes. Property taxes are surging.
"The taxes are going to go up anyway, that's my whole point all the time," said Antonia Infante, who has lived there for 30 years. "They're giving incentives to all these developers, but they're not giving any incentives or any breaks in our taxes. It's really hard for people like me, and especially in our neighborhood, it's all broken down in pieces, because we don't have somebody representing and fighting for us."
Attitudes toward Broadway East vary across the neighborhood. Infante said she doubted she could have afforded to shop there, but many residents say they were excited to see it go up. They hoped the project would bring green space and high-quality retail to the neighborhood, maybe even a grocery store.
As of now, there's not much on the site. Many of the properties are parking lots, surrounded by chain-link fences.
"We were never, ever anti-development. We loved the idea, we just wanted it done responsibly," resident Cindy Tower said. "We want it thoughtful, we want it pleasant, we want it sustainable, we want to get families in there, not a bunch of people who are going to come or go."
Whoever buys the Broadway East properties will be required to follow through on GrayStreet's plan, Covey said. The firm has already rezoned the properties.
"There may (be) some modifications on uses," he said. "I live here and want to see this come to (life) the way we envisioned it and as such we know that the new owners will stick to the original plan for a large mixed-use environment with public spaces."
Last summer, GrayStreet sold a 3.4-acre plot to Dallas developer Encore Multifamily, which plans to build a 386-unit apartment complex as part of Broadway East. Encore is proceeding with the project, spokeswoman Amy Dunaway said in an email.
"Somebody's going to come in" and build Broadway East, Government Hill resident Todd Mernin said. "I believe that anybody who has a vision and common sense will see the things that GrayStreet was going to do and go forward with it."
Covey, who holds a degree in economics from the University of Chicago, founded GrayStreet in 2011 and staffed it with experienced investors and financiers. One of the partners is his father, Paul Covey, who has worked as a developer since the early '70s. He has served as guarantor on some of GrayStreet's loans.
Covey's mother, Beatriz, comes from the wealthy Barrera Segovia family in Monterrey, Mexico, which has strong banking connections. Covey spent much of his childhood in Monterrey. He has said that many of the firm's investors are his family from Mexico, and friends he made at Saint Mary's Hall in San Antonio.
Many of the loans which GrayStreet accepted during its mid-2010s acquisition spree matured in 2020, or are set to mature in 2021, according to records from the Bexar County Clerk. In other words, the final payments are due in those years.
In 2016, the firm accepted five loans from Inter National Bank, which has since merged with Vantage Bank Texas, worth a total of $23.2 million, maturing in October and November of this year, the records show.
Documents from the county clerk show that GrayStreet has taken at least $172 million in loans from banks since 2013. The documents don't always specify the amount borrowed, so GrayStreet's borrowed total is likely well above that.
One of the lenders is CCJ Capital High Quality CRE Asset Fund I, a partnership which shares the same address with GrayStreet and has Covey's brother, Eric, listed as a governing member.
The maturing loans haven't put a strain on the firm, Covey said, and its debt level has little to do with its decisions to sell its properties.
"I believe our current debt levels are quite low relative to the typical commercial real estate leverage ratio for many of our peers and has little to do with the decisions to sell any individual property," he said.
» Dallas developer plans five-story apartment complex as first phase of GrayStreet's Broadway East community
» Massive $560M Broadway East development near Pearl set to begin next month
» Amid rapid change, Government Hill divided on how to absorb incoming development
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