DivcoWest Moves onto Sacramento’s Highway 50 Corridor
Submitted August 14, 2010, 12:27 PM
San Francisco-based DivcoWest Real Estate Investments has made its first-ever purchase in the Sacramento-area office market with the 642,262 square-foot Prospect Green portfolio in Rancho Cordova. Divco paid $68 million for the property, or about $107 a square foot.
The price represents a more than 50 percent discount from trades in the U.S. Highway 50 corridor submarket during the boom from 2005 to 2008 when like properties were changing hands in the $200 a square foot to $250 a square foot range, said Jim Gray, a partner in the Sacramento office of brokerage Cassidy Turley/BT Commercial. It is consistent with values last seen from 1995 to 2000, he said.
DivcoWest founder and principal Stuart Shiff declined comment for this story.
Divco has been active for at least a decade in office markets in the San Francisco Bay Area including San Francisco proper, Silicon Valley and the peninsula.
According to industry sources, the capitalization rate or yield on the purchase was 9 percent. This return is based on the existing net operating income in the property. This return could be goosed to 11.5 percent or even 12 percent if more of the property is leased, sources said. The present occupancy rate approaches 70 percent. Tenants include Barclays Bank plc, NEC Corp., Pearson plc, Allstate Insurance Co., Moss Adams LLP and Aerojet, a GenCorp Co.
Divco is in talks with the State of California to lease space in the property. If successful, it could move occupancy to 75 percent, sources said.
The purchase includes a six-story office tower and five mid-rise buildings. The six-story One Capital Tower was developed in 1989 and is one of the only mid-rise office buildings visible from Highway 50. The buildings were developed in phases ending in 2001 and are part of a 33-acre office campus that includes a 2.5-acre redwood park.
The Prospect Green portfolio is in a seven-million square-foot master-planned community known as Prospect Park. The initial buildings in the park were built in the 1980s; the last building was finished in early 2009.
Vacancies in the Highway 50 Corridor submarket have more than doubled in the last 24 months.
“In the last two years we have seen vacancies go from 10 percent to 22 percent” in the Highway 50 corridor, Gray said. “If there are cutbacks in state government, it will take the market a long time to recover. The majority of recent signed leases in the submarket have been done with the state.” The submarket has 12 million square feet of office space.
Asking rates along the route are $1.75 a square foot for full service. Actual rents are likely 10 percent or even 15 percent lower, Gray said. It is a renters’ market and owners are giving free rent and costs for tenant improvements.
Divco made the investment for its commingled fund Market Street Capital Partners. Through March of this year, the company still had $400 million of equity left to spend from the fund. It recently paid $16 million to acquire Boston office building 9-11 Beacon St., which has 147,751 square feet. That deal represents the company’s first asset purchase in downtown Boston.
Divco formed Market Street Capital Partners in 2006. The total equity raise was $650 million. One of the larger investors in the fund is the California Public Employees’ Retirement System, which committed $100 million in July 2006. The pension fund placed a net asset fair market value on its investment of $44.8 million through the end of March. This value increased from $42 million through the third quarter of 2009. CalPERS considers the investment opportunistic.
Divco is now in the marketing phase for its follow-on fund to Market Street Capital Partners. It hopes to raise $500 million in equity. It will have a value-added investment strategy. Deals will be considered nationally, but are expected to lean toward West Coast markets, including the greater San Francisco region.
