Principal Brings “Build-to-Core Strategy” to North San Jose

Lincoln Property, North San Jose, Silicon Valley, Bay Area, Midpoint @237, Gemdale, Trammell Crow, Principal

By Jon Peterson

Des Moines, Iowa-based Principal Real Estate Investors is bringing its “build-to-core” strategy to North San Jose as part of its investment in the MidPoint@237 development in North San Jose. The real estate investment firm declined to state how much it has invested in the project, but it will have a majority ownership position in the property.

The first phase of the development on this project has broken ground. The development partner on the project is Trammell Crow Company. The initial part of the development will have three Class A advanced manufacturing buildings that total 600,000 square feet. The expectation is that this part of the project will be completed by the third quarter of next year.

“This project is a very good example of a “build-to-core” strategy that we can employ for one of our commingled funds. In this case the project will be placed into the Principal U.S. Property Account. This is our core open-ended commingled fund product. It has gross net asset value of $8.1 billion, through the end of September. We think that once this project is built and stabilized it will become a core asset, and we plan to hold it on a long-term basis,” says Rod Vogel, senior managing director with Principal.

While the U.S. Property Account is a core investment fund, there is a portion of the investments that does allow for different kinds of transactions. “For this commingled fund, we can invest up to 15 percent of the fund in either value-add or development kinds of transactions. We would consider the “build-to-core” strategy for the four main property types of office, industrial, retail and apartments,” said Vogel.

One of the reasons for pursing the “build-to-core strategy” is the ability to achieve higher returns and not get into a bidding war for existing core assets. “What we try to do is achieve a 200 basis point higher return for development in comparison to buying an existing core property. The other benefit is that we are not competing with other capital sources once the property is built and stabilized,” said Vogel.

Principal and Trammell Crow have owned the site for MidPoint@237 since late in 2013. The total size of the development is 57 acres. The initial phase of the project covers 35 acres. The second phase of the project has not been set in stone yet. “The plan for now is that it could be a combination of office and/or R&D. That could change depending on how the first phase of the project works out,” said Vogel.

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