The Bay Area Real Estate Journal
Watergate Office Complex Attracting Buyer Interest
Submitted October 25, 2009
The buzzards are already circling the soon-to-be-foreclosed Watergate office buildings in Emeryville.
Neither Divco representatives nor bank President Brian Waters would comment for this story. But Divco, which has a history of opportunistic or vulture real estate investing, appears a logical buyer. Divco also sought to acquire the Watergate complex three years ago but was beaten by a rival bidder.
The Watergate complex consists of four office towers and a free-standing restaurant with 1.2 million square feet. Only three of the office towers with a total of 814,000 square feet and the restaurant building are in default. They were acquired by the California Public Employees’ Retirement System and Hines in late 2006. CalPERS and Hines, via their National Office Properties LP, borrowed $152 million from Pacific National Bank for the acquisition. Now the partnership has relinquished the properties to the lender. The loan, which was refinanced in 2008, had not been paid down at the time of default, according to Real Capital Analytics.
A separate Hines affiliate, Hines Real Estate Investment Trust Inc., owns the fourth Watergate office tower. It has 344,000 square feet and is 100 percent leased. HSH Nordbank holds a $98 million mortgage on the building, which sits at 3400 Data Drive in Emeryville. The REIT paid $145 million for the asset, according to public record.
It is not clear whether bank executives or Divco sought the October meeting, There is also no indication if Divco will even make a run for the asset. Should it, however, one irony is clear: One of the equity partners in the Divco fund likely to buy the property is CalPERS.
In 2006, Divco raised $650 million in equity for its Market Street Capital Partners commingled fund. CalPERS committed $100 million. The California State Teachers Retirement System is another investor. It approved a $180 million commitment in August 2006.
The bank is expected to foreclose on Watergate in the second week of November.
Some in the real estate industry doubt that Pacific National will be able to recover its full $152 million from the Watergate. The property is 85 percent occupied, according to Real Capital Analytics. San Francisco-based Pacific National, which has $2.12 billion in assets, has not experienced large real-estate related losses in the San Francisco Bay Area. The Watergate is its only bad loan among more than 400 troubled loans in the nine-county region identified by Real Capital since July 1, 2007.
That said, the bank’s exposure to real property is substantial, according to bank filings with the Federal Deposit Insurance Corp. At mid-year, the bank reported an average of $1.62 billion in outstanding loans throughout the quarter. More than $1.57 billion of the total were secured by real estate, the vast majority of it commercial properties.
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