Clarion Accepts 5 Percent Yield on San Francisco Purchases

By Jon Peterson

New York City-based Clarion Partners expects to achieve a 5 percent going-in yield on the two Class A office acquisitions it has just completed in San Francisco.

But with rents in both properties 20 percent below current market rates, a Clarion managing director expects that return to rise a percentage point or slightly less as leases roll.

“Once we bring rents to market level, the cap rate would then be increased to somewhere in the range of 5.8 percent to 6 percent,” Richard Pink, a Clarion managing director in the company’s Los Angeles region office, told The Registry. “The [San Francisco] office market is in the third inning of a nine-inning game. The Class A market is very tight.”

Clarion bought 600 California St., a 20-story, 360,000-square-foot tower in the North Financial District, for $180 million, or just over $500 a square foot, according to the company. The seller was an affiliate of Boston-based Beacon Capital Partners LLC. The Federal Home Loan Bank is the largest tenant with about 80,000 square feet, said Colin Yasukochi, director of research and analysis for CBRE Group Inc. in San Francisco. Another 50,000 square feet are available in the property, which was built in 1990. Meade Boutwell, a CBRE senior vice president in San Francisco, characterized the price as “very fair” for what he described as a “great asset.”

Clarion also acquired 475 Brannan in the South of Market area for $148 million from Prudential Real Estate Investors. The building was fully leased at the time of sale to such tenants as Dolby Laboratories Inc. and Steelcase Inc.

Both building acquisitions were completed last week.

The properties are not the first in San Francisco that the real estate investment manager has sought to acquire in the current market upturn. Approximately nine months ago, the company made the decision to buy in the steamy San Francisco market but in two recent cases found itself in second place to other more aggressive bidders, Pink said.

“We made bids on 555 Mission St. and Foundry Square IV [500 Howard St.] but were beat out by other capital sources. The good news was that we had practice on how to underwrite deals in the market, and I think this helped us with the two properties we were able to get,” Pink said.

The Union Investment Group, a German fund advised by Seattle-based Metzler North America Corp., paid $446.5 million, or $802 a square foot, for 555 Mission St., according to CBRE research. That equated to a 4.5 percent going-in capitalization rate, or yield. Chicago-based Heitman LLC paid $184.5 million, or $791 a square foot, for 500 Howard. That translates to a 7.1 percent capitalization rate.

Pink said he is not concerned that much of the San Francisco leasing demand is coming from a relatively narrow band of technology and tech-related companies. Indeed, Clarion wants to buy additional San Francisco Bay Area offices as well as industrial, retail and apartment properties. It is focused on assets from San Francisco down the Peninsula and into Silicon Valley. “We can buy for either our commingled funds or separate-account clients that we have,” Pink said, and could consider everything from the most conservative “core” assets to outright new development.

Clarion has more than $24 billion in real estate assets under management.

West Coast Commercial Real Estate News