J.P. Morgan: Better Early Than Late for Spec Development

By Jon Peterson

New York City-based J.P. Morgan Asset Management, the money source behind Tishman Speyer Properties’ grand office plans for San Francisco, has its fingers crossed that by being in on the first two speculative office developments in downtown since 2007, it will be ahead of the curve.

“With speculative development, we would prefer to be a little early rather than late. Capital will inevitably return to this segment of the market. Our goal is to be delivering when other projects are just getting started,” said Kevin Faxon, head of the Real Estate Americas investment business of the asset management group.

The real estate investment manager is the investment partner to New York City-based Tishman Speyer on a 286,000 square-foot project at Howard and First streets and a 452,000 square-foot project planned for 222 Second St.

The Howard and First building is to be started with not a single tenant in hand. The total development cost, expected to reach as much as $185 million, will be 100 percent funded with equity. The majority of this capital is to come from the bank on behalf of institutional clients. The manager would not comment if it were from a separate account or commingled fund source, or the amount it is investing in either project.

“We see strong demand from technology and Internet-related tenants. Traditional tenants in the FIRE (finance, insurance and real estate) industries have not been nearly as active,” Faxon said.

The Howard and First development is likely to be completed by the end of next year, while the 222 Second St. project is slated to be ready for tenants by the end of 2014.

Michael Covarrubias, chief executive for San Francisco-based TMG Partners, said speculative office development in the city does now make sense, even though his company has pursued the redevelopment of existing buildings, which is cheaper than building new. “We had an existing property at 680 Folsom that was ready for this strategy,” he said. For TMG, the difference in cost in the two approaches is between $200 a square foot and $250 a square foot, he said.

The 680 Folsom St. building will have more than 500,000 square feet including a more than 100,000 square-foot addition. TMG recently signed two large leases with the online operation of Macy’s Inc. and Riverbed Technology Inc., bringing the property to nearly 80 percent leased.

“From an economic standpoint, it is now feasible for spec projects to happen based on where rents are,” Covarrubias said. “Rents for Class A space are now in the high $50s to low $60s a square foot. When these projects are ready for tenants, the rents could be in the high $60s to low $70s per square foot,” he said.

Through the end of March 2012, J.P. Morgan had real estate assets under management of $51.4 billion.