Hines Selling Three San Mateo Buildings

By Jon Peterson

Houston-based Hines Real Estate Investment Trust Inc. has put a three-building San Mateo office complex on the block.

The sale will test investor demand for Peninsula office space that is a step down from Class A and confidence in the market’s longer-term performance. The Peninsula office market has shown signs of weakening leasing fundamentals in the first half of the year after nearly three years of declining vacancy rates and rising rents.

The 254,000-square-foot property is being offered without a price. The buildings are situated at 1900 Alameda de las Pulgas, 1950 Alameda de las Pulgas and 2000 Alameda de las Pulgas.

“Most of the institutional-quality office properties in the region are controlled by Equity Office Properties, and they have made the decision at this point not to sell,” said Steve Hermann, an executive managing director for Cassidy Turley Commercial Real Estate Services in its San Francisco office. Hines has retained Hermann as the properties’ listing agent. Hines declined comment for this story.

“We think that these properties will attract capital that is looking at a core to core-plus kind of a transaction. There is strong income today, and a chance to add value as leases come up for renewal over the next few years,” Hermann said.

2000 Alameda de las Pulgas is 83 percent occupied; the other two buildings are fully leased. Two main tenants are insurer California Casualty Management Co., which has its headquarters at 1900 Alameda de las Pulgas, and the County of San Mateo. Sonitus Medical Inc. also signed a lease for 25,200 square feet at 1900 Alameda de la Pulgas in the second quarter, according to Colliers International brokerage.

Hines acquired 1900 Alameda de las Pulgas and 2000 Alameda de las Pulgas in June 2005 for $59.8 million, according to public filings with the Securities and Exchange Commission. At the time, 1950 Alameda de las Pulgas was a cafeteria and loading dock, which Hines converted in 2007 to a 22,000-square-foot office building.

Hines REIT is a publicly traded company that is managed by Hines Advisors L.P. It has no employees. In the Bay Area, the company owns 2100 Powell St. in Emeryville, a nearly 346,000-square-foot office building that it acquired in December 2006 for nearly $145 million.

It also has partial ownership interests in two San Francisco office properties: 101 Second St., a 388,000-square-foot office building acquired for $157 million in 2004, and the nearly 380,000 square-foot KPMG Building, which was bought at the same time for $148 million. The REIT holds a 23 percent interest in each San Francisco property.

Overall, the Hines REIT owns in whole or in part 57 U.S. properties including offices and grocery-anchored shopping centers with a total value of $3.4 billion through the end of March.

Mike Cobb, a Colliers senior vice president who specializes in the Peninsula market, characterized Hines’ Alameda de las Pulgas properties as “decent, grade B buildings.”

“They are not in a core San Mateo office location,” he said, but “worth noting about that project is that it has better access to [Interstate] 280 than most, and there is some demand for that. As much as the drive for public transit, people from the city are interested in access from 280, as are the executives coming from the Woodsides of this world.”

The Peninsula office market has been on a steady path to recovery since mid-2009, with 10 consecutive quarters of falling vacancy to a low of 9.8 percent direct vacancy at the end of last year, according to Colliers’ research. But the decline reversed in the first half of the year, and the weakness has persisted. “Gross absorption is down this quarter, and it is an open question as to why,” Cobb said.

A common explanation for the Peninsula’s flattening is that few large-scale spaces are available, which is what really drives big changes in the leasing market when the likes of Google Inc. and Apple Inc. are active. “But I really am wondering on the Peninsula and in the [Silicon] Valley, too: Is the market flat because there are no big spaces available” or has tenant demand actually slowed, Cobb said. Sublease space availability also has ticked up slightly.

Whatever the case, he does not think the current rent gap between the top of the market, the “class A downtown Palo Alto” buildings, and the bottom of the market can be sustained. The delta is unusually large, Cobb said, and his guess is that class B rents will rise before class A rents do.

When he sees the sales price for the Hines buildings, Cobb said, he will be looking for signals about the buyers’ outlook: “If they buy at a number that is baking in some rent growth, that says there is some confidence in the market.”

Hermann says the only recent comparable sale to that of the Alameda de las Pulgas properties is 101 Lincoln Center Drive in Foster City, a 105,000-square-foot property that sold in December. Boston-based TA Associates Realty paid $27.83 million, or $265 per square foot, to acquire the property from San Francisco-based DivcoWest Properties, according to Cassidy Turley.

Image courtesy of: Hines.

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