By Jon Peterson
Harrisburg, Pa.-based Pennsylvania State Employees Retirement System was the capital source used by Chicago-based LaSalle Investment Management in its joint venture with Emeryville-based Harvest Properties for the acquisition of the 275,551 square foot Century Centre I & II in San Mateo. The properties are located at 1400 and 1450 Fashion Island Blvd.
The buyer acquired the property at a mid-single-digit cap rate. “The cap rate was in the low to mid 5 percent range. This return is based on where the existing income in the property will be over the next 12 months,” says Tom Wagner, a partner with Harvest Properties.
The buyer expects the return on the property to increase over the next several years. “Once the property becomes stabilized over the next three to five years, the cap rate would be in the low 7 percent range. For us stabilization means once all rents in the complex are at a market rate and the property has reached 95 percent or better in occupancy,” said Wagner. The property is now 93 percent occupied.
There is plenty of room before the rents in the properties would be brought up to market levels. “The average in place rents in the property are now at $2.55 per square foot on a gross basis. This makes them approximately 40 percent to 50 percent below market,” said Wagner.
Avison Young in its first quarter 2014 market data had office building rents for Class A space at $3.75 per square foot for full service in San Mateo.
LaSalle sees there being a benefit to buying properties with Harvest. “Together, the Harvest and LaSalle teams are able to leverage our deep expertise in the local market to drive strong returns and restore Century Centre I & II to its status as a signature property in the market for years to come,” says Erick Paulson, a manager director with LaSalle in a prepared statement. He works out of the company’s corporate office in Chicago.
The deal in San Mateo represents the second transaction the two firms have done together in the San Francisco Bay Area in the past three months. In December of last year, they formed their first joint venture to buy 60 South Market Street in downtown San Jose. “We look forward to strengthening our relationship with Harvest Properties to transform Century Centre I & II to meet the needs of today’s real estate environment,” said Paulson in a written statement.
Avison Young believes that Century Centre I &II is a high quality asset. “This is a strong Class A property that is well located in San Mateo. I think that this purchase shows that there remains strong interest from institutional capital in the market,” says Tim Grant, a senior vice president with Avison Young in its San Mateo office.
He doesn’t think that the sale of Century Square being an isolated occurrence for San Mateo. “There is going to be several other significant properties being sold in the near future,” said Grant.
The market fundamentals for the office market in San Mateo are good. “There was a drop in vacancy in the market over the last quarter from 9.2 percent to 8.6 percent. There has also been a steady rise in rental rates that I would think should be sustainable as we move forward,” said Grant. The San Mateo office market now totals 7.6 million square feet.
Penn State Employees made the investment in the San Mateo complex through LaSalle as a separate account real estate transaction. This is a relationship where the pension fund has the manager looking to buy properties for them on a direct basis. It only looks to invest in core assets. The value of the assets in the separate account were pegged at $272.9 million through the end of 2012, according to the pension fund’s Web site.