San Francisco office-building sales
may exceed $5.3 billion this year, the most since the market
peaked in 2007, amid a technology-fueled rent surge that shows
no signs of slowing.
Twenty-two downtown office properties changed hands through
July 20, three deals were pending, and 10 buildings and two land
parcels were listed and drawing robust investor interest,
according to brokerage CBRE Group Inc. The average purchase
price has risen to $465 a square foot, the highest since 2007,
when it was $516 a square foot on $8.6 billion of sales, CBRE
data show.
San Francisco and the adjacent Silicon Valley are
“arguably the two strongest” U.S. office markets, research
firm Green Street Advisors Inc. said in a July 24 report.
Citywide office rents jumped 28 percent in the second quarter
from a year earlier as Internet firms Airbnb Inc., Twitter Inc.
and Yelp Inc. (YELP) signed new leases, according to CBRE.
“It’s pretty easy to see why prices are escalating so
quickly with a tech boom going on,” Dan Fasulo, managing
director at property research firm Real Capital Analytics Inc.,
said in a telephone interview. “It’s a phenomenon taking place
nowhere else.”
Office rents may rise a further 25 percent over the next
two years as tenant demand continues and supply remains tight,
Kenneth Rosen, an economist at the University of California,
Berkeley, said in an interview. More than half of the 2.6
million square feet (242,000 square meters) of new office space
set to open by 2014 is already leased, brokerage Cassidy Turley
estimates.
Safe Haven
San Francisco’s “red-hot” market has lured U.S. pensions,
closely held funds, real estate investment trusts and overseas
buyers seeking perceived safe havens for their money, according
to the Green Street report. Even with yields at 5 percent or
lower, money is flowing to the city’s commercial property
because benchmark 10-year U.S. Treasury notes have sunk below
1.5 percent, said Jed Reagan, an analyst at the Newport Beach,
California-based firm.
“International and domestic capital is looking to invest
in gateway cities, and San Francisco qualifies in spades,”
Richard Pink, managing director at New York-based real estate
investor Clarion Partners, said in an interview. “It’s got a
tech industry that is strong and broad, and a quality of life
that compares with anywhere in the world.”
Biggest Prize
Clarion bought two San Francisco office buildings last
month on behalf of pension clients, paying $180 million, or $502
a square foot, for 600 California St. in the financial district,
and $147 million, or $603 a square foot, for 475 Brannan St. in
the South of Market area, according to Pink.
The biggest prize now on the market is 101 California St.,
a 1.25 million-square-foot cylindrical office tower that may
fetch as much as $1 billion, based on the highest recent per-
square-foot prices, said Russell Ingrum, San Francisco-based
vice chairman of CBRE’s capital group.
Nippon Life Insurance Co.’s 92.4 percent interest is up for
sale through a U.S. real estate unit, according to marketing
materials from listing broker Eastdil Secured LLC. The 48-story
tower, developed by Houston-based Hines and designed by
architect Philip Johnson, is 92 percent leased and offers a
central location and “breathtaking” views, Eastdil said.
The high-rise is the city’s second-largest office building,
behind Vornado Realty Trust (VNO)’s 555 California St., according to
CBRE. Tenants include Bank of America Corp., with 122,000 square
feet; Morgan Stanley, with 100,000 square feet; and Deutsche
Bank AG, with 75,000 square feet.
“It’s iconic, truly special and unique,” Ingrum said.
Hines Stake
Hines will retain its 7.6 percent stake and manage the
building, according to Eastdil. James Buie, Hines’ chief
executive officer for the western region, didn’t return calls
seeking comment. Darwin Rodriguez, an Eastdil vice president,
and Greg Berardi, a spokesman in San Francisco for Osaka, Japan-
based Nippon Life, declined to comment.
“The obvious candidates for 101 California are banks or
insurance companies that would team up in a syndication,” said
Fasulo. “Capital is looking for returns, and you can’t get it
with U.S. bonds.”
Hamburg-based Union Investment Real Estate GmbH paid $446.5
million, or about $802 a square foot, for 555 Mission St. in
May, the top price this year, according to CBRE.
The city’s price record was set in June 2007 with Morgan
Stanley (MS)’s purchase of the One Market complex, part of a
portfolio acquisition from Blackstone Group LP (BX), for $953 a
square foot, CBRE said. The deal was financed largely by
commercial mortgage-backed securities.
Midtown South
The only U.S. submarket that compares to San Francisco is
New York’s midtown south, the area roughly between 34th and
Canal streets that’s popular with technology and media
companies, Fasulo said. Recent deals there include SL Green
Realty Corp. (SLG)’s agreement in May to buy 304 Park Ave. South for
$135 million, or $628 a square foot, CBRE data show.
Across the U.S., office buildings in major cities had the
biggest price gain of any real estate sector, rising 8.1 percent
in May from February, according to Moody’s/RCA Commercial
Property Price Index.
Investing in San Francisco isn’t without risk. Tech firms
make up as much as two-thirds of the city’s tenant demand, and
buyers late to the cycle will be most vulnerable to a slowdown
in a market known for booms and busts, said Reagan of Green
Street. The 2001 dot-com collapse was followed by a 60 percent
rent plunge, he said.
‘Most Volatile’
“San Francisco is the most volatile market in the
country,” Reagan said. “These investment strategies do raise
some concerns, with the city so dependent on tech.”
Recent office sales already value 101 California St. above
the cost of replacing the building, usually an alarm signal,
said Rosen, the University of California economist. Construction
of a building in the financial district would be about $700 a
square foot, said Pink of Clarion Partners.
San Francisco added 3,800 professional-service positions in
June, a fourfold increase over the average monthly gain, while
tech employment rose to the highest level since 2000, according
to California’s Employment Development Department. The office
vacancy rate in the second quarter fell to 9.7 percent citywide,
and to 4.3 percent in South of Market, CBRE data show.
The regional economy, home to global trendsetters such as
Apple Inc. (AAPL), Google Inc. and Twitter, propels innovation
worldwide and is “unique in the world,” said Frank Fudem, a
San Francisco-based partner at Cassidy Turley.
Investors who recall the dot-com implosion and 2008
financial crisis know what they’re getting into, and are
assessing real estate with care, said Ingrum of CBRE.
“Today, people are much more rational and clear-eyed about
risk,” he said. “The cost of money is so low that you can pay
more and still get the same return.”
To contact the reporter on this story:
Dan Levy in San Francisco at
dlevy13@bloomberg.net
To contact the editor responsible for this story:
Kara Wetzel at
kwetzel@bloomberg.net
San Francisco Office Sales Set to Post Best Year Since 2007
Chip Chipman/Bloomberg
San Francisco and the adjacent Silicon Valley are “arguably the two strongest” U.S. office markets, research firm Green Street Advisors Inc. said in a July 24 report.
San Francisco and the adjacent Silicon Valley are “arguably the two strongest” U.S. office markets, research firm Green Street Advisors Inc. said in a July 24 report. Photographer: Chip Chipman/Bloomberg
July 31 (Bloomberg) — Richard Pink, managing director at New York-based real estate investor Clarion Partners, talks with Bloomberg’s Dan Levy about the market for office space in San Francisco including 101 California St., a 1.25 million-square-foot cylindrical office tower.
San Francisco office-building sales
may exceed $5.3 billion this year, the most since the market peaked in 2007, amid a technology-fueled rent surge that shows no signs of slowing. (Source: Bloomberg)