Leased Milpitas Offices on the Market

By Jon Peterson

A 60,000-square-foot Milpitas office building leased to Kaiser Permanente and a fitness center has gone on the market for $16.2 million.

The private seller has held the property for more than a decade and wants to diversify, said Drew Arvay, a partner with Cassidy Turley Commercial Real Estate Services in its San Jose office. The existing rents are producing $1.1 million in annual income with scheduled rate increases. Based on current revenue and the stated sales price, the property is yielding not quite 6.8 percent.

Arvay and Senior Vice President Gary Hansen are the listing agents.

“We think the property will attract a great deal of interest from investors outside the area. These would include capital sources located outside the country,” Arvay said, or U.S. companies seeking to expand into the Bay Area for the first time.

The owner negotiated a 10-year lease that began last year with Kaiser for 41,900 square feet of the building. The property is one of four that the huge health care company has near South Milpitas Boulevard and East Calaveras Boulevard, the eastern extension of state Highway 237. It houses dermatology, laser-vision correction, ophthalmology, child and adolescent psychiatry and chemical dependency services at the property. Kaiser is paying $1.95 a foot plus operating expenses and has agreed to 2.7 percent annual rent increases. The deal includes two, five-year extensions.

The rental rate is well above the $1.67 a square foot average asking rate for offices in Milpitas, quoted on a full-service basis, according to first-quarter numbers from Cornish & Carey Commercial Newmark Knight Frank.

Fitness USA, a chain of health clubs and gyms, has a three-and-a-half-year lease on another 18,100 square feet in the building. The company has California locations in Milpitas, Daly City and San Francisco, according to its Web site. The rental rate on this space is $0.51 and includes one, mid-term escalation.

The property was remodeled in 2002.

Vacancy in Milpitas office buildings has remained stubbornly high and remains 3 percentage points above where it was in mid-2009 at more than 17 percent. Asking rates have been flat for 10 quarters. That compares to an office vacancy rate of less than 5 percent in Mountain View—on the western end of state Highway 237—where rents have risen from $2.50 a foot a month at the beginning of 2010 to not quite $4, quoted on a full-service basis.

“This situation does leave some room open for the buyer to add value to the property once [the Fitness USA] lease expires,” Arvay said. He believes the sales price is about half of the property’s replacement cost.

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