Publics Gobble Up Bay Area Real Estate

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Over the last year, Maryland’s Federal Realty Investment Trust, which counts San Jose’s Santana Row as its single largest capital investment at nearly $600 million, has said it would add to its kingdom, investing another $100 million to build more apartments. The company has also proposed a second office building at Santana Row. The REIT has another $120 million invested at San Jose’s Westgate Shopping Center.

In South San Francisco, life science REIT Alexandria Real Estate Equities Inc. in January began development of a single-tenant building with 170,618 rentable square feet at 259 East Grand Ave., which is 100 percent pre-leased to Onyx Pharmaceuticals Inc. The company closed $55 million in construction financing in June.

In September, Colorado-based multifamily REIT Archstone Inc. filed amended documents with the U.S. Securities and Exchange Commmission to become public again. It outlined more than $1 billion in current and proposed construction projects in the Bay Area and identified seven regional land sites that were in planning and owned and another four sites in San Francisco that were in planning and company controlled.

In April, Pebblebrook bought the 108-room Hotel Milano for which it paid $29.8 million or $275,000 a room. Then on Oct. 25, it said it had acquired San Francisco’s Hotel Palomar for $58 million, or not quite $300,000 a room. The Milano and Palomar hotels, at 4th and Market streets in San Francisco, are on the same block.

Now the company says it is closing the Hotel Milano on Nov. 1 to reposition and rename it. It estimates that it will spend no less than $11.5 million and that it will reopen the hotel in the first quarter of next year.

Pebblebrook became a public company only in December 2009 and has bought aggressively in San Francisco beginning in June 2010 when it acquired Union Square’s iconic Sir Francis Drake Hotel, paying $90 million, or $216,000 a room, for the 416-room historic property, then investing another $9 million in improvements, according to the company.

That purchase was followed in February 2011 with the $84 million buy of the Argonaut Hotel near the city’s Fisherman’s Wharf, where it also invested another $3.3 million.

Still, the PwC and ULI “Emerging Trends” report highlights areas of caution for the Bay Area. Not quite a third of the more than 900 survey respondents said San Francisco office investors should be selling—up 20 percentage points from a year ago and slightly ahead of the rate who said the same thing about Washington, D.C. Twenty percent said San Francisco hoteliers should be cashing out—more than in any other market except for Philadelphia and Chicago.

Lots of press and public attention has focused on job creation in San Francisco and Silicon Valley, and each market is expected to have 50,000 more jobs than it did in 2007 by the end of next year, the report said. Yet, those advances are dwarfed by Houston, which is expected to add more than 300,000 jobs from its 2007 base in the same time, and Dallas-Fort Worth, which is slated to add not quite 250,000.

Also, while San Jose and San Francisco currently can boast a greater percentage than the nation as a whole of the 25-year-old to 34-year-old Echo Boomer population cohort, both markets will see that all-important age demographic grow less slowly in the next decade than the nation at large. That is not true in Seattle, Houston, Phoenix, Orange County or Austin, Texas.

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