Kilroy Realty Moves South

By Jon Peterson

The all-cash purchase of Menlo Corporate Center by Kilroy Realty Corp. won’t be the Los Angeles company’s last in the Silicon Valley, its chief investment officer said.

After buying seven office properties in the San Francisco Bay Area since 2010—five of them in 2011 alone—Kilroy has moved down the Peninsula to acquire the 374,000 square-foot Menlo Park campus.

“We looked for a long time to make sure we got the right asset for our first property in the market. This will certainly not be our last property that we buy in the region. Our goal is to find more like it in the future,” said Eli Khouri, Kilroy investment chief.

The Menlo Corporate Center was developed in phases from 1985 to 1990. It was less than 80 percent occupied at the time of the sale. The rents in the property are 10 percent to 15 percent below market, and the property has some staggered lease terms in the next three years.

Kilroy paid $162.2 million. It’s likely that the publicly traded real estate investment trust will put some debt on the property in the future. Leverage on its properties can vary from the mid-30 percent to the 40 percent range.

Kilroy believes the Menlo Park market is on the upswing. “There is still room for improvement, and that is why the property had some vacancies. I think that we will be able to build some momentum over the next several years and bring some new tenants into the complex,” Khouri said.

Kilroy has invested heavily in the Bay Area in the last several years, focusing especially on San Francisco’s South Financial District. It has also acquired properties in Kirkland and Bellevue, Wash., in the same timeframe. The purchase is the first of what the company expects will be a steady progression of Peninsula and Silicon Valley acquisitions.

The West Coast real estate company targets markets rich in knowledge workers, with world-class research universities and an industrial base tied to global demand. The largest majority of its nearly 15 million square feet of office and industrial holdings are in Southern California. However, all but about 175,000 square feet of the nearly 2 million square feet that it bought last year were outside the region.

Its tenants are in the new media, information technology and entertainment industries. Last year, two of its most significant leases were with DirectTV Inc., which signed a more than 15-year lease for its corporate headquarters in El Segundo, and Pac-12 Enterprises in San Francisco for 11 years. Its largest tenant by annual rent and square footage is Intuit Inc., the accounting software company.

Facebook Inc.’s new headquarters campus is less than three miles away from the Menlo Corporate Center.

Khouri is the former chief investment officer for Silicon Valley’s Spieker Properties, which was sold to Equity Office Properties Trust in 2001 in a $7.2 billion transaction. He co-founded and served as managing director of Broadreach Capital Patners.

With the Menlo Park acquisition, Kilroy has acquired eight office projects with 2.6 million square foot in the Bay Area, investing approximately $877 million in the region. Last year, it also acquired 4040 Civic Center Drive in San Rafael, a 127,000 square-foot office building, for $32.2 million. Menlo Corporate Center is at 4100-4700 Bohannon Drive.

The new owner bought the property from a joint venture that included Chicago-based Walton Street Capital as the largest money partner. The company did not respond to phone calls seeking comment. A smaller equity investor in the property was Glendale-based American Realty Advisors. The operating partner was Menlo Park-based Lane Partners.

Kilroy took 21 days from start to finish to complete the purchase. The broker representing the seller was Michael Leggett, a senior managing director for Holliday Fenoglio Fowler in its San Francisco office. He did not respond to phone calls for comment.

The vacancy in Menlo Corporate Center is a little higher than the market average. According to a fourth quarter 2011 report from Colliers International, vacancy for class A office space ended the year at 12.3 percent. The Class A office market in Menlo Park totals 1.66 million square feet.

The publicly traded REIT looks to improve the office buildings that it buys. These could be through a renovation or buying properties that can be re-leased up to market rate levels.

West Coast Commercial Real Estate News