Hudson Pacific becomes one of the most prominent landlords in the Bay Area, and it’s just getting started.
THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN OCTOBER 2015
By David Goll[dropcap]V[/dropcap]ictor Coleman is eager to make the most of Hudson Pacific Properties, Inc.’s recent acquisition of 26 top-flight office properties in one of the nation’s premier commercial real estate markets.
The high-energy chairman and CEO of the Los Angeles-based public real estate firm, which specializes in the ownership and management of West Coast commercial buildings and complexes, said the company plans to invest $250 million in tenant improvements over the next three years in its Class A office buildings along the Highway 101 corridor in San Mateo and Santa Clara counties.
In a $3.5 billion deal, Hudson Pacific took over the 8.2-million-square-foot portfolio—including two parcels totaling 40 acres in Milpitas and San Jose that could accommodate up to 1.1 million square feet of new office space—in April from New York-based private equity giant Blackstone Group L.P.[quote]”This has enabled us to gain a lion’s share of this market, a market in which we had a strong desire to make major headway,” Victor Coleman said. “It gives us a strong presence in multiple locations with a portfolio that has great assets.”[/quote]
Other local industry observers said there is little doubt why the portfolio is considered a plum. The office buildings are located in the heart of the nation’s hottest economy—the Peninsula and Silicon Valley cities of Burlingame, San Mateo, Foster City, Redwood City, Redwood Shores, Menlo Park, Palo Alto, Santa Clara, San Jose and Milpitas. It gives Hudson Pacific a total of 33 office buildings and complexes throughout the Bay Area, including such landmark properties as San Francisco’s historic mixed-use Rincon Center and Metro Center in Foster City, with its 22-story office tower.
“Generally speaking, the [Highway] 101 corridor is perhaps one of the most desirable office investment markets in the country, only behind downtown San Francisco and Manhattan,” said Gary Willard, vice president/western director of the National Office and Industrial Properties Group for Marcus & Millichap, a Calabasas, Calif.-based commercial real estate services firm. “San Francisco and Manhattan are major [central business districts] with higher rents, though the 101 corridor is getting closer. And this is a portfolio where the properties are well-maintained.”
Coleman said the average age of the newly acquired properties is about 20 years old. Improvements and updates to the structures will include lobby renovations, bathroom upgrades and, where tenants turn over, remodeling of office space. He said one office complex in San Jose that has a now-empty outdoor swimming pool will have the outside space renovated to encompass casual seating areas, food services and collaborative work spaces now favored by technology companies and their largely millennial workforces.
“Every asset in this portfolio will see improvements,” Coleman said.
One of the key advantages to taking over the properties was increasing occupancy rates and rents, according to Coleman. He said occupancy, which stood at 81 percent after last spring’s transaction, has already reached nearly 89 percent—well ahead of company projections for 85 percent by year’s end and on track to easily top the 90 percent goal by late 2016.
New tenants or those that renew their leases will see a 30 percent increase in rent, Coleman said, adding his company expects a 70 percent annual lease renewal rate among its tenants in the former Blackstone portfolio properties.
Not surprisingly in this region, about half of the tenants in the new Hudson Pacific properties are high-tech companies, ranging from smaller, well-established companies to such tech giants as Apple Inc., Google Inc., Amazon.com Inc., GoPro Inc. and Qualcomm Inc. Coleman said he’s happy to accommodate all comers in his Class A office space, whatever the business.
“Anyone with top-rate credit, regardless of the industry, is a potential tenant in one of our properties,” he said.
There is little risk for Hudson Pacific to bet on the Silicon Valley and Peninsula real estate market, said Drew Arvay, senior vice president in the San Jose office of Cushman & Wakefield. The region’s ever-expanding economy in a finite, increasingly built-out geographical area makes Class A space lucrative and valuable.
“From a performance and value-growth standpoint, Silicon Valley outperformed almost every market in the country,” Arvay said. “We have single-digit vacancy rates. Apple, LinkedIn, Facebook and Google are each snapping up a couple of million square feet of space. And a lot of underperforming [office] properties in this area have been gobbled up for residential development.”
Mike Rosendin, executive vice president in the San Jose office of commercial real estate firm Colliers International, echoed the rosy assessments of Arvay and Willard. He said Hudson Pacific is in the catbird seat as the region’s largest landlord of Class A office space.
“Tenants today are willing to pay for quality space to keep employees happy,” Rosendin said. “Leasing velocity has been impressive this year and, in some industry segments, they’re running out of high-quality space. Rents will continue to push up. Hudson Pacific is interested in partnering with tenants that want to invest in creating that kind of quality environment for their employees.”