Private Funds Look to Deploy Dry Powder—But in the Bay Area?

Rockpoint Group, Colliers,ASB Real Estate Investments, Union Property Capital,

Aerial Photograph of San Francisco and The Bay AreaBy Joe Gose

The Bay Area’s job growth continues to propel a wave of real estate capital hunting for investments into the market, and property experts don’t see it receding anytime soon.

Private equity real estate funds have fueled a good portion of the investment sales activity, acquiring $6.5 billion of properties during the first nine months of 2014, the most of any buyers, according to DTZ’s San Francisco Bay Area Commercial Real Estate 2015 Forecast.

Among other funds, the $2.5 billion Beacon Capital Strategic Partners VI vehicle sponsored by Boston-based Beacon Capital acquired the 445,395-square-foot 888 Brannan St. office building midway through 2014 for $187 million. In October, Boston-based Rockpoint Group paid $307 million for the 475,000-square-foot 275 Battery St. office property.

All told, in San Francisco alone last year, more than $5 billion in office buildings and $771 million in apartment properties with 10 units or more changed hands, according to Colliers International’s 2014 Year-End & Forecast Report. In the office sector, that ranked as the third highest dollar volume in 18 years, behind $9.8 billion in 2007 and $6 billion in 2012. Apartment dollar volume grew by 42 percent over 2013.

“San Francisco is sucking up dollars,” said Tony Crossley, an executive vice president with commercial real estate brokerage Colliers, who specializes in downtown investment sales. “The money is domestic and offshore, but six of the last eight deals I’ve done have been with Chinese buyers, who are looking for land and buildings.”

Indeed, while buyers of all stripes are pursing deals in the Bay Area, foreign investors in particular are the most willing to pay top dollar for properties, said Garrick Brown, vice president of research for the Western region at real estate brokerage DTZ. Subsequently, they may be crowding out others.

“A lot of our traditional investors, whether private equity, REITs, insurance companies or private buyers, are increasingly looking elsewhere for acquisitions,” he said. “Here, at least for core product, they are being outbid.”

Still, private equity real estate funds have ample weight to throw around. Worldwide, the funds reported $742 billion in assets under management in 2014, the highest level ever according to Preqin, an alternative asset data collector and researcher. Plus, Preqin noted that as of December the funds had amassed $217 billion in uncalled capital, or “dry powder,” with which to make investments. That was an increase of $30 billion over the course of 2014.

Yet even though private funds shelled out the most cash for real estate in the Bay Area during the first three quarters of 2014, they also were among the most active sellers over the period, disposing of roughly $7.8 billion in assets, according to DTZ.

The brisk pace of property dispositions by private equity funds doesn’t surprise Daniel Cressman, the executive managing director at commercial real estate brokerage Newmark Cornish & Carey in San Francisco. He noted that buyers who entered the market only two or three years ago have seen property values accelerate more quickly than they expected.

“They’re saying: ‘I could get a profit today after only a couple of years of ownership, and it’s a profit I was projecting to get after seven years. Why wait another four or five years?’” explained Cressman, who has been focusing on selling land entitled for residential development.

In February, for example, Washington, D.C.-based ASB Real Estate Investments and San Francisco-based Union Property Capital sold the 28,450-square-foot 135 Mississippi St. to Zurich Alternative Asset Management for $20 million. The joint venture said in a press release that it had acquired the property in 2012 at a “significant discount to replacement cost” and re-tenanted the building to full occupancy.

Beyond the opportunistic sellers, very few property owners are willing to put their properties on the market, Crossley added. Even with record pricing, landlords are content to hold and avoid a potential tax hit as well as the process to find a suitable replacement investment.

Juxtaposed against the lack of product for sale, the huge amount of capital searching for deals in the Bay Area continues to drive up prices. In its 2015 Bay Area forecast, DTZ pegged the average capitalization rate nine months into 2014 at 4.5 percent for all properties, ranging from 4.4 percent for office buildings to 5.6 percent for retail assets, with apartments and industrial real estate trading in between.

Consequently, like other buyers, private equity investors still in the market are accepting lower going-in yields because they need to deploy capital, said Gregory Martin, a partner and national real estate practice leader at accounting firm Moss Adams in San Francisco.

“More foreign buyers, from sovereign wealth funds to investment managers to family offices, are putting downward pressure on yields because they have a long-oriented wealth preservation strategy,” he said, “as opposed to short-duration ‘value’ or ‘opportunistic’ strategies.”

West Coast Commercial Real Estate News