By Jon Peterson
Boston-based Massachusetts Pension Reserves Investment Management Board (Mass PRIM) and San Francisco-based DivcoWest Properties will be bringing the 542,743 square foot 333 Bush Street office building for sale in either June or July, according to sources familiar with the property.
“While I don’t think that we are at the peak in the San Francisco office market for rents and values, I do believe that we are approaching it. With 333 Bush, we have completed our business plan and we have created some value with this property,” says Tim Schlitzer, senior investment officer for real estate and timber for Mass PRIM.[contextly_sidebar id=”S2aP46565ov3r0cgkLqrlZI9pLB5LQkq”]A company representative of DivcoWest declined to comment for this story. Mass PRIM owns 98.1 percent interest in the property and DivcoWest 1.1 percent.
The sale of the property is expected to produce a price well beyond the asset’s value. According to a Mass PRIM document, the property’s value is now at $311.9 million or $581 per square foot, although the public tax documents for the year 2014-2015 list the total value of the building and land at $227 million. The pension fund would like to sell the property for at least $366 million or $675 per square foot. The low forward return projections on the sale would be a 3.7 percent cap rate and a 5.8 percent IRR.
In August of 2013, a joint venture between DivcoWest’s entity DivCore (a venture set up by DivcoWest and LoanCorp Capital) and Boston-based AEW Capital Management purchased the building for $275 million, or $507 per square foot from Toronto-based Brookfield Asset Management. The building went into foreclosure in 2009 after its then-anchor tenant, the law firm of Heller Ehrman, went into bankruptcy.
Mass PRIM had engaged an independent San Francisco-based project advisor to provide a second opinion on the sale recommendation, according to a pension fund document. This company was Bard Consulting. This advisor supports the sale of the property at $675 per square foot.
The pension fund has completed its business plan on the property. One part of this was to lease up some of the empty space in the property. When the property was acquired in October of 2013, the property was 87.8 percent occupied. It was underwritten with tenant departures dropping the occupancy down to 82 percent. Two tenants that left the property in 2014 were BankServ and Mid Ventures/Microtek. Since that time the occupancy has been increased to 90 percent. One of the new leases that was signed was with Littler Mendelson for 35,504 square feet.
Another part of the business plan was to spend $3.5 million of capital to upgrade the lobby and elevator and to conduct deferred maintenance. The owners were also able to roll 36 percent of the rent roll to market rents. These rents were at a 24 percent discount at the time the property was acquired.
Mass PRIM now owns the property as a separate account investment with Boston-based AEW Capital Management. When it originally invested in the property, the pension fund considered it to be a value-add asset. It has now been moved into the investor’s core portfolio.
There are four major tenants in the property that make up 52 percent of the asset. 16 percent of the building is occupied by Sedgewick LLP, 15 percent by Kixeye, 11 percent by National Park Service and 10 percent by Lewis Brisboi Bisgaard and Smith.
Mass PRIM has placed 333 Bush as one its top to properties in its separate account real estate portfolio. The top ten list does have one other Bay Area asset. This is the 175,728 square foot Strawberry Village shopping Center in Mill Valley. The equity value on this property is $134.3 million. This investment is currently owned in a separate account with Chicago-based LaSalle Investment Management.
Image courtesy of CBRE