Big East Bay Office Foreclose Expected to Further Depress Rents
Submitted April 20, 2010, 11:01 PM
With the default by Teachers Insurance & Annuity Association on its mortgage on the East Bay’s Stoneridge Corporate Plaza, area rental rates are likely to remain under pressure. Should they keep falling, it could drive other properties into default as well.
The five-building, 562,000-square-foot Class A office complex in Pleasanton, located at Interstates 680 and 580 across from Stoneridge Mall, was among roughly eight million square feet of offices that traded hands in 2007 at the height of the market. Now owners like TIAA-CREF are struggling to cover expenses amid high vacancies and declining lease values, leading to defaults and foreclosures.
If lender Metropolitan Life Insurance Co. forecloses on the property, either it or new owners would have a basis in the property, allowing them to lower rents and undercut comparable properties in the same market. In time, more landlords could be forced into default as well.
Stoneridge Corporate Plaza is the quintessential suburban office complex with its quintet of mid-rise buildings set in a 2.5-acre park. With meandering sidewalks, lawns, ponds, streams and fountains, the setting is popular with walkers, some wildlife and as a backdrop for school group photographs.
Brokers currently list roughly 27,000 square feet of space available at Stoneridge Corporate Plaza for $1.80 a square foot a month, full service. That’s close to the average asking rate for Class A space in the local submarket, according to several brokerages. In the first half of 2008, similar space in the Tri-Valley submarket was going for about $2.25 a square foot a month, according to Cassidy Turley/BT Commercial.
Class A rates in the Pleasanton area have been on a downward trend but that trend appears to have bottomed out or stabilized, said Jeff Birnbaum, first vice president at CB Richard Ellis’ Pleasanton office. Brokers are seeing a flight to quality by tenants opting to move up to Class A space thanks to the cheaper rents, he said.
TIAA decided to stop making payments on its $87.5 million loan with MetLife earlier this year, said Abby Cohen, media relations manager for the New York City-based retirement system that serves employees in the nonprofit sector.
“We believe this is a prudent decision in light of the property’s current economics,” Cohen said. “We made this decision in line with our responsibility to seek the most attractive long-term investments for our clients.”
MetLife indicated to TIAA that “they wish to foreclose on the property and take over ownership,” Cohen said.
A spokesman for MetLife, Chris Breslin, declined to comment on plans for Stoneridge Corporate Plaza, citing client confidentiality.
“We will work cooperatively with MetLife to make sure neither party suffers any unnecessary loss,” Cohen said. “While TIAA remains willing to negotiate a restructure of the loan, that decision belongs to MetLife.”
Stoneridge Corporate Plaza’s five buildings were valued at a combined $155.2 million for fiscal year 2009-2010, according to Alameda County tax assessor records. The owner was liable for a total of $1.85 million in property taxes in the current year, and all payments were made, records show.
The complex’s tenants include Ericsson, which has the fourth floor of 6160 Stoneridge Mall Road, as well as Morgan Stanley Smith Barney LLC; AIS (Auto Insurance Solutions); employment agency Bayside Solutions Inc.; and marketing, advertising and public relations firm Shennum Green Inc. Tenants that have left the complex include Liberty Mutual, which had about 30,000 square feet in 6130 Stoneridge Mall Road, and Phoenix-based Opus West Corp., which had its East Bay office on the third floor of 6160 Stoneridge Mall Road. Opus West filed bankruptcy in 2009.
TIAA-CREF bought Stoneridge Corporate Plaza in 2004 from National Office Partners LP, a joint venture of global office property developer and owner Hines and CalPERS. They bought the property in 2001 from Carlyle Realty, according to news reports.
The combination of eroding rents and rising expenses hit another Pleasanton office complex as well: Brittania Business Center. A partial interest-only loan, collateralized by a 276,000-square-foot office building built in 1993, was transferred to a special servicer in May 2009, according to a Fitch Ratings news release in February. The building’s largest tenant vacated its space at year-end 2008, leaving the property 43 percent occupied, and the borrower is having difficulty leasing the space, Fitch said. The Brittania Business Center loan is delinquent and the special servicer is pursing foreclosure, the rating agency said.
