San Francisco Office Values Begin to Crystalize
Submitted May 6, 2010, 8:25 PM
Investors in downtown San Francisco are already beginning to see the outlines of tomorrow’s marketplace and prices. There were three small sales during the first quarter, and some larger sales are expected to close this month.
According to industry sources, the cap rate on 303 Second St. is expected to be in the upper 6 percent range. This return is based on the existing net-operating income from current leases in the property. The property has rents that are pretty much at market rate in the mid $30s per square foot for full-service rents.
“303 Second St. is a multi-tenant building, is in a good location and is well occupied. All these factors make it a property that can be compared to other deals in the future,” Seifer said.
There was plenty of buyer interest in the property, too; it attracted nearly 20 bids. The top seven or eight of the offers were north of $300 a square foot. The value is not that much different from when the asset traded in 2005 for $338 a square foot, according to data from Eastdil Secured and Jones Lang. There has been more that 550,000 square feet of leasing in the property in the last three years.
One of the sales that closed during the first quarter was 49 Stevenson St. The 126,100 square-foot property is located in the South Financial District. It sold for $24.2 million in an all-cash transaction. This amounts to $192 per square foot. The cap rate was 4 percent. The buyer was Pacific Resources Group. The seller was Invesco Real Estate, which is based in Dallas but has a regional office in San Francisco.
The third sale in the first quarter was the 94,000 square-foot 550 Montgomery St. (below), which sold for $12.65 million, or $135 per square foot. The buyer was Downtown Property Holdings, and the seller was The Lurie Co. The property has a 50-year lease with the Bank of America set to expire in November of this year.
San Francisco office-market rents have recovered smartly from cyclical lows, according to data from Eastdil. Based on an analysis of market rents from peak to trough in the last four real estate cycles from 1979 to 2007, rents rose an average of 117 percent after hitting their cyclical lows. Recovery lasted anywhere from three to six years. Rents' average compounded annual growth rate was 19.6 percent across the four cycles, with the highest rental peak in the last 28 years reached in 2000 when it hit $69.58 a square foot.
There is another big San Francisco sale on the horizon (however, Seifer argues that it won’t be much help in setting San Francisco pricing): 333 Market St., generally known as the Wells Fargo Building. The property is fully leased to Wells Fargo Bank, and there are 16 years left on the lease; there is a termination option seven years out. The rent in the property is above market today but well below replacement costs.
“Given that the property has a single tenant with strong credit, it attracts a different kind of buyer. You will have investors going after this property that would never be interested in a multi-tenant building,” Seifer said.
The cap rate on 333 Market will also be higher, likely north of 7 percent. This return would be based on the existing lease in the building, sources said.
Another difference to consider in the 333 Market St. and the 303 Second St. sales are the prices paid for the properties in 2005 and 2006. On 303 Second St., Los Angeles-based Kilroy Realty Corp. is expected to pay about the same amount that The Multi-Employer Property Trust through Seattle-based Kennedy Associates Real Estate Counsel paid for the property in 2005: $237 million. It is expected to be an all-cash purchase. That is not expected to be the case for 333 Market St. Industry observers say the price for this asset will be around $328 million. This would mean the Des Moines, Iowa-based Principal Real Estate Investors will take a loss on the property. It paid $370 million for the property in October 2006 for its US Property Account core commingled fund. The sale of the 657,000 square-foot property is expected to close sometime in May.
