By Jon Peterson
Hartford, Conn., -based Cornerstone Real Estate Advisers has put San Francisco’s 201 Spear St. on the market; it is the second large office building in the city’s highly sought South of Market Street district that Cornerstone has put on the block in recent months.[contextly_sidebar id=”c7415b1c08f4a03f1a6d4ac1ca3b2394″]The 19-story building, a handsome red brick structure on the southeast corner of Spear and Howard streets, is expected to trade in the neighborhood of $450 a square foot, or $119.7 million, according to sources familiar with the sale.
The buyer’s capitalization rate, or initial operating yield, could be in the low 4 percent range, but opportunity exists to add value. Current occupancy in the property is not quite 83 percent, putting its vacancy significantly above the submarket’s overall vacancy rate of 6 percent to 7 percent. The vacancy in the 266,048-square-foot building also consists of three full floors. The class A property was built in 1985.
San Francisco’s South Financial District is one of the city’s most attractive workplace centers. 201 Spear is a block-and-a-half from The Embarcadero and is surrounded by restaurants and other neighborhood amenities. A ground floor Starbucks is a focal point for the intersection.
The other Cornerstone building up for sale, 795 Folsom St., with 185,500 square feet, is the former headquarters of Twitter Inc. in the city’s Yerba Buena district, also South of Market but further west.
Cornerstone should achieve a sizeable gain on the sale of the Spear Street property, which it bought in 1999 from Equitable Life Assurance Society for $62.5 million, or almost $235 a square foot, according to The Registry research and research from the San Francisco office of Cassidy Turley Commercial Real Estate Services. The cap rate was 6.5 percent.
“This is a high quality property that should be able to attract tenants given the demand that is now in the submarket,” said Eli Ceryak, a vice president with Cassidy Turley in its San Francisco office. “Having full floors available for rent should be a good thing for the next owner. There are few examples like this in the marketplace now.”
Cornerstone has signed several new leases at 201 Spear in recent months, according to Cassidy Turley. MacFarlane Partners, a real estate investment management firm, agreed to lease 13,723 square feet for five years, paying a “base” rental rate, or starting rate, of $57 a square foot annually for full-service space. The lease expires on June 1, 2018.
Corrum Capital Management leased 4,409 square feet for a year at a base rental rate of $63 a square foot annually, also full service. The tenant is an investment management firm that invests in a variety of asset classes including real assets and private equity.
New leases signed last year at 201 Spear had base rental rates as low as $40 a square foot, according to Cassidy Turley.
Cornerstone owns 201 Spear Street for Cornerstone Patriot Fund, an open-ended commingled fund that focuses on core, or low-risk, properties nationwide. It has total assets valued at $2.1 billion, sources familiar with its finances said.
Unlike closed-end funds, managers for open-ended commingled funds generally have no pressure to sell assets in a certain time period. The structure allows the manager to raise capital from new investors with no time limits. Cornerstone is also not under the gun to move assets out of the portfolio because it has no entry queue for new investors seeking to commit capital to the commingled fund.
There are some open-ended core funds that have such large entry queues that any new financial commitments will not be placed into the fund until the manager is ready, usually when they buy new properties or existing investors opt out. Examples are the J.P. Morgan Strategic Property Fund and UBS Trumbull Property Fund.
Cornerstone requested that its broker on the sale, Eastdil Secured in its San Francisco office, handle communications about the sale. The person working on the trade is Stephen Van Dusen, a managing director in San Francisco. He declined comment.