Boston Properties Builds San Francisco, Exits Downtown San Jose

By Sharon Simonson

Even as office landlord Boston Properties aggressively pursues San Francisco office construction, including speculative development, and beefs up its ownership in Mountain View, it is shedding assets in downtown San Jose, saying the market after 10 years has not lived up to expectations.

Silicon Valley San Jose San Francisco real estateExecutives for the real estate investment trust said May 1 that they are exploring ways to speed development of the 1.4 million square-foot Transbay Transit Tower in San Francisco by nearly a year or more, while also examining whether to take on a capital partner.

At the same time, the Boston-based real estate investment trust has started speculative development on a second San Francisco office tower at 535 Mission St. with 307,000 square feet, also adjacent to the city’s new Transbay Transit Center.

The company is rushing to take advantage of the persistent demand from tech tenants to be in the city. “Uber, Microsoft, Google, Yahoo!, WeWorks, Square and AppDynamics are all looking for large blocks of space in the CBD of San Francisco,” said President Douglas T. Linde.

The company acquired the Mission Street site in February and expects to deliver the $215 million project by mid-2014 with occupancy by the end of the year. The company prefers leases of two floors or more. “We expect a broad range of smaller tech tenants and legal users,” Linde said. They anticipate a 7 percent return.

Original plans called for construction on the Transbay Tower, slated to be the tallest building on the West Coast, to start as early as this summer and to be complete by 2016, just before the opening of the adjacent transit center.

Under questioning from an analyst about how the company intends to proceed with the project, including attitudes about building speculatively, Linde said the company has found a way to cut 10 months to 14 months from the timeline while creating a natural stopping point before starting vertical development when it can reassess the market.

“We will have an interesting question, which is how do we feel about the activity at 535 Mission, how do we feel about the other activity in the city, what pre-leasing commitments might we be able or have we made? It is a work in progress,” Linde said.

The company and its minority partner Hines have already spent $192 million to buy the 50,000-square-foot parcel and would have another $120 million or so invested at that point, Linde said. Also during the quarter, Boston Properties increased its interest in the project to 95 percent from 50 percent after a proposed Hines equity partner fell out of the deal. Linde did not give additional details.

At the same time, company executives said the REIT had agreed to take millions of dollars in write downs on a downtown San Jose office building with 158,000 square feet acquired in 2006 plus a neighboring 3.7 acres entitled for 850,000 square feet of office development. The company has owned the land since 2000.

“E&Y, the accounting firm, came to us to talk about their future tenancy, [and] we started thinking about our re-leasing assumptions,” Linde said. Ernst & Young occupies 110,000 square feet in the property, and its lease expires in 2016. “Quite frankly, we felt that given our view of the submarket, it probably made sense to consider a sale.”

The company agreed to part with the building, which was built in 1995, for $40 million, or $253 a square foot. Linde did not identify a buyer.

The company took a $3.2 million charge to net income in its first quarter in relation to the pending sale of 303 Almaden Blvd. and an $8.3 milion impairment expense that reduced the value of the land to $29 million. It now is considering whether to sell the land as well.

“The downtown San Jose market has just not experienced the level of activity that we had hoped for when we started making these investments in this market. We just haven’t been able to get anything going on our new development, and we’re really now rethinking our plans for that [site],” Linde said.

The San Jose building sale is part of a larger disposition effort by Boston Properties to sell $1 billion more in assets this year in addition to $510 million in sales in the first quarter. The company also sold 125 W. 55th St. in New York City. The company has eight office projects under development, including 680 Folsom St. in San Francisco, where it expects to invest $340 million. That tally does not include 535 Mission or the Transbay Tower. Overall the company anticipates $1.77 billion estimated total investment in the eight projects that it has underway.

Boston Properties owns more than 40 million square feet of class A offices in five U.S. markets: Boston, New York, Washington, D.C, Princeton, N.J., and the San Francisco Bay Area.