Divco, TPG See South Silicon Valley Rising

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Berg paid $525 million for the Microsoft campus and Apple buildings plus three additional properties in Mountain View, San Jose and Morgan Hill. The Microsoft campus was valued at more than $260 million, the five Apple buildings at $180 million.

In total the two sale transactions recognized a $1.323 billion enterprise value for Mission West and financed liquidating distributions of an estimated $9.20 a share to shareholders. That is a premium of more than 20 percent above the average closing share price in the three months before the company announced it was contemplating sale.

With the exit of one of the region’s few remaining first-generation property tycoons from the large-scale ownership ranks, the sale marks the end of a Silicon Valley era. Berg began investing in the valley in 1965 joining with business partner John A. Sobrato.

He and Sobrato split their interests in 1978. Berg sought to specialize in the valley’s research and development-oriented properties reasoning that cheaper space would always lease first in a down market. Sobrato catered to the tech-user base that wanted higher-quality office finishes.

For a while, Berg’s business formula succeeded. In 1998 and 1999, after Mission West went public, its portfolio was 99 percent leased while also growing quickly, moving from 4.5 million square feet to 5.3 million square feet in one year’s time—all propelled by the rush of the dot-com boom. “We build the buildings for the high-tech companies that build the Internet” was the company’s marketing slogan. Even after the initial public offering of stock, Berg remained on as Mission West’s chairman and chief executive. He and his family largely controlled the company’s ownership.

Today Sobrato is transitioning from a largely Silicon Valley-centric commercial portfolio to one with new holdings on the Peninsula and in San Francisco. R&D property has fallen out of favor with many Silicon Valley tenants, and there is general consensus that today’s tech users, even in more hardware-oriented Silicon Valley, often want highly improved office workspace with a minimum of three stories and often more.

At the end of 2012, occupancy in the Mission Web portfolio was clinging to 70 percent and management was warning of a further decline as leases expired on another 418,000 square feet in the final three months of the year and 2013. “Notwithstanding the improving local economic conditions, due to the substantial overhang of vacant R&D properties throughout the Silicon Valley, we believe that we are unlikely to see a sustainable recovery in the leasing market for our properties prior to 2013,” management said Nov. 27.

Still, there is no question that the portfolio holds promise for Divco and TPG. Several of the North San Jose properties are well positioned at strong corners on the North First Street spine of North San Jose, the city’s largest industry cluster. Under current city land-use policies, those properties are allowed to redevelop at three times the current density up to floor-to-land-area ratios of 1.2.

In addition, some of the Mission West portfolio is ripe for repositioning—a tried-and-true tactic for many a Silicon Valley investor in the past. “Divco and TPG are both smart players, and they know what they are buying,” Moriarty said. “Knowing them, they are going to get aggressive on leasing and putting in market-ready interiors and redoing interiors if they have to.

“They are a believer, as am I, that the market is getting better and better.”

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