Hudson Pacific Sells 222 Kearny to LBA Realty for $51.8MM

Hudson Pacific, LBA Realty, San Francisco, Bay Area

By Jon Peterson

Los Angeles-based Hudson Pacific Properties has sold the 148,797 square foot 222 Kearny Street office building in San Francisco for $51.8 million or $348 per square foot to Irvine-based LBA Realty, as stated by the seller in its 2016 fourth quarter earnings report. This figure has factored in before any credits, prorations and closing costs have been paid.

The sales price on a per square foot basis is much lower versus the average price of $750 per square foot that office buildings are being sold in San Francisco, according to multiple sources that track the sale of office buildings in the region.

There are several reasons for this fact. “222 Kearny is subject to a relatively short-term, partial ground lease. Additionally, the asset requires some fairly significant near-term capital improvements,” says Alex Vouvalides, chief investment officer of Hudson Pacific Properties.

The seller declined to give out any specifics on how much of the property involves a ground lease and how much longer the ground lease lasts. However, according to multiple sources familiar with the property, the ground lease has 25 years left to run, and it covers roughly 1/3 of the property.

Hudson Pacific had several factors to consider in the selling of the property. “222 Kearny was purchased shortly after Hudson’s IPO in 2010. It was the right time to recycle capital from a sale of 222 Kearny into other investments and capital projects. A robust marketing effort led to pricing that reflects a 50 percent premium to our purchase price and a 30 percent premium to our basis. The ground lease renewal and near-term capital requirements also played a role,” said Vouvalides.

Hudson Pacific sold the property through its listing agent, the San Francisco office of Eastdil Secured. The property had been 91.4 percent occupied, through the third quarter of last year. One of the larger tenants in the property is Kimpton Hotels.

It would seem logical that LBA would be buying a property that needs to be improved going forward. The real estate investment manager has a history of buying and improving office and industrial properties in its target markets. San Francisco is one of these as the company has a regional office in this city at 1 Embarcadero Center, according to its Web site. Its other regional offices are located in Seattle, Los Angeles, San Diego, Denver and Phoenix.

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