Tennessee Pension Fund Buys 343 Sansome

By Jon Peterson

Nashville-based Tennessee Consolidated Retirement System has paid $105.75 million to acquire the 260,000-square-foot 343 Sansome office building in downtown San Francisco.

343 Sansome The Registry real estate San FranciscoThe pension fund bought the property through its separate account manager, New York City-based Clarion Partners.

Clarion anticipates an initial return on the property of 5 percent, moving up to 6 percent in the next couple of years. Exiting rents in the property are 25 percent below market.

“One of the main attractions to the property is the potential for us to increase value in the future. We are now having discussions with both existing tenants and possible new tenants that we’d like to bring into the property in the future,” said Richard Pink, a managing director for Clarion in its regional office in Los Angeles.

The purchase was accomplished with a combination of cash and debt. An existing $55 million that the new owner felt was too expensive to retire was assumed.

The seller of 343 Sansome was Davis-based Interland LLC. The real estate investor was represented by Eastdil Secured. The brokers involved in its San Francisco office were Senior Managing Director Jeff Weber and Vice President Darwin Rodriguez. Interland and Eastdil did not respond to phone calls seeking comment.

“I think that our recent success in San Francisco with the purchase of 600 California [St.] and 475 Brannan [St.] really raised our profile in the broad market and with the brokerage community. The acquisition of 343 Sansome was a very smooth process,” Pink said.

In July of this year, Clarion paid $180 million for 600 California and $148 million for 475 Brannan.

343 Sansome has two buildings. One was developed in 1908, and the second one was built by Hines in 1991. The property’s occupancy was 93.5 percent when the deal with Clarion closed. Some of the main tenants include Wells Fargo Bank and West Coast Life Insurance, according to the seller’s Web site.

Clarion likes the recent performance of the North Financial District, which is the submarket where 343 Sansome is located. “The market has performed strongly over the past year, and our research indicates that it hasn’t peaked yet. There are barriers to entry, making San Francisco an attractive market for us to invest,” said Rob Greer, a managing director and portfolio manager for Clarion in Washington, D.C. Greer is the portfolio manager of the separate account with Tennessee.

The North Financial District has had a strong year. According to data supplied by CBRE Group Inc., vacancy has improved from 10.3 percent in the fourth quarter of 2011 to 8.3 percent for the fourth quarter of this year. Class A average full service asking rents have gone from $40 a square foot in the fourth quarter of last year to $51.89 for the last quarter in 2012.

Clarion is not done investing in the Bay Area. “It’s one of our targeted markets. We have a four-member team focused on investing in this region. We are looking for office, industrial, retail and apartments. The deals could be core, value-added, and if the right opportunity presents itself, could be development as well,” Pink said.

Clarion has a non-discretionary relationship with Tennessee. The pension fund must approve any deal with the manager before a final closing can occur. Tennessee currently owns one other property in the San Francisco bay Area through Clarion, the Rivermark Village Shopping Center in Santa Clara.

Tennessee does have plenty of room in its real estate portfolio to add more assets. The pension fund is projecting to have a value placed on its real estate portfolio of $1.7 billion by the end of December. This means it has 4.7 percent of its $36.4 billion of total plan assets invested in the asset class. The targeted allocation for real estate is 7 percent.

Photo courtesy of Interland

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