Investors Flock to San Francisco Office Deals

By Jon Peterson

Institutional investors in two San Francisco office buildings in the city’s North Financial District have agreed to accept initial yields of 5 percent or less, according to investment sales brokers active in the marketplace.

Toronto-based Sun Life Assurance Co. of Canada expects to earn less than a 5 percent capitalization rate on its purchase of 660 Market St., a 1920s-era building with five-stories. The nearly 38,000-square-foot property sits on the cusp of the city’s thriving Union Square shopping district, the Yerba Buena district south of Market Street and the burgeoning Mid-Market Street submarket.

“The cap rate that Sun Life is earning on 660 Market is based on the current income the property is producing,” said Erik Hanson, a senior financial analyst with Colliers International in its San Francisco office.

Hanson and senior vice presidents Tony Crossley and Tim Maas represented the sellers, San Francisco-based Union Property Capital LLC and Chicago-based Heitman LLC. Union Property Capital and Heitman bought 660 Market in August 2007 for $19 million. Hanson declined to give the exact sales price in the current transaction. The brokers are affiliated with Colliers’ San Francisco Investment Services Group.

Meanwhile, Atlanta-based Prudential Real Estate Investors and New York City-based Tishman Speyer Properties have formed a joint venture to buy the 484,000-square-foot 650 California Street. The purchase price was $223 million with the deal producing a 5 percent capitalization rate, according to CBRE Inc. and its San Francisco research office.

Theresa Miller, a vice president for global communications for Prudential Financial Inc., declined comment on the CBRE price or capitalization rate. Boston-based AEW Capital Management was the seller. AEW did not respond to phone calls seeking comment.

PREI and Tishman Speyer both hold an ownership stake in the 33-story property, which is now 92 percent occupied. The tenants include law firm Littler Mendelson P.C., banker and asset manager Credit Suisse Group AG and advertising agency Goodby Silverstein & Partners, Miller said.

San Joe-based Cisco Systems Inc. announced in June that it had hired Goodby to be its new “branding and advertising partner.”

PREI made its investment in 650 California for its US Property Fund V, a commingled fund that had its first closing with an equity raise of $315 million from six institutional investors based in Germany. More capital will be raised for the fund going forward, Miller said.

The fund is organized to invest in property considered low risk to moderately low risk, dubbed core and core-plus by those in commercial real estate. Core-plus implies some strong income from day one with a chance to add value by adopting a re-leasing or expansion strategy. Investing in office buildings is a main strategy for the fund though it could also finance apartment development. From a market perspective, the commingled fund wants to be active in top U.S. markets including San Francisco, Washington, D.C., Boston and New York, Miller said.

660 Market represents a re-leasing and leasing opportunity for both the retail and office components of the property. There are 11,500 square feet of ground-floor retail in the property and 6,700 square feet are vacant. Radio Shack is an existing retail tenant, Hanson said.

The project has 26,000 square feet of offices, all of which are leased but some of which will become available in the next several years. “There is a strong re-leasing opportunity here as the existing rents in the property are 60 percent off market rents. This fact and the empty retail in the property will give the new owners a chance to grow the income coming out of the property,” Hanson said.

The San Francisco investment sales market is active, according to mid-year research from Colliers International and other brokers. In the first six months of the year, there were more than $2 billion in investment sales of class A, B and C buildings. Properties valued collectively at an equal or greater amount are in escrow or have been recently brought to market. Colliers predicts total transaction volume could exceed $5 billion this year. The city’s all-time high water mark was $8.3 billion in Class A property sales in 2007.

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