By Jon Peterson
A New York City-based real estate investor with a history of ownership in the region plans to invest as much as $250 million in equity in trophy San Francisco properties.
Paramount plans a total equity raise of $600 million to $1 billion and is looking to invest up to 25 percent each in San Francisco and Washington, D.C., with the remainder in New York City, according to a document from the Pennsylvania retirement system.
This is the first time that the pension fund has invested with Paramount.
The overall investment strategy for Fund VII is to invest in trophy office buildings that have property-specific issues that Paramount can effectively manage to generate value-add returns. The investor projects a net internal rate of return for investors in the commingled fund of 10 percent to 14 percent and a doubling of equity. There will be 60 percent debt placed on the commingled fund.
The pension fund made the commitment on the recommendation of Cleveland-based Courtland Partners. The real estate consultant stated in a board meeting document that Paramount has proven its ability to find opportunities that require re-tenanting a building or managing near-term lease rollover in order to generate attractive returns.
The fund manager has had its current investment strategy since 1995 and has realized a net IRR since inception of 27.4 percent.
The pension fund stated in a board document that Paramount focuses on these markets due to lower vacancy rates, higher rental rates and resiliency. The investor also believes that these markets can be volatile, which creates opportunity for experienced operators. It expects the mismatch between maturing real estate debt and the amount of financing available in the next several years to generate good chances to buy well.
Paramount Group declined to comment for this story. According to its Web site, the only asset it owns in the San Francisco market now is the 1.6 million square foot One Market Plaza office building (pictured), where it also has a regional office.
“The Paramount Group is a well-known big player for office buildings in San Francisco and other markets around the country,” said Russell Ingrum, a vice chairman and managing director in the capital markets group for CBRE Inc.
He is not surprised the company owns so little in the city, Ingrum said: “San Francisco attracts a lot of interest from many different sources. It’s one that is very competitive and is very pricey for many investors to deal with.”
Paramount has a nationwide office-building portfolio valued at $10 billion, according to a pension-fund document. The fund manager sold $4.5 billion of its portfolio in 2006 and 2007 when it believed investors were overpaying for properties. Paramount employs 210 people.
Photo courtesy of justise.com