By Andrew S. Ross
Updated 11:17 am, Monday, September 29, 2014
This month New York’s Rockefeller Group that owned One Market Plaza, sold 50 Beale Street, a 660,000-square-foot skyscraper south of Market, to New York’s Paramount Group for $395 million.
In the same week, Columbia Property Trust of Atlanta, which owns 221 Main St., a 16-story high-rise near the Transbay Transit Center, closed on its $309 million acquisition of the Hanford Building, the 33-story, 480,000-square-foot office tower at 650 California Street in the Financial District.
“We have established a significant presence in downtown San Francisco — a market that continues to be one of the best in the U.S.,” Columbia Property CEO Nelson Mills said in a statement. Meanwhile, Boston’s Pembroke Real Estate bought 100 California St. for $182 million.
“We have been looking in San Francisco for our first deal for 18 months,” David Lucey, Pembroke’s senior vice president, toldThe Registry, an online trade publication that keeps track of Bay Area commercial real estate.
Norway’s sovereign wealth fund is already here. Having acquired a 47.5 percent stake in the 38-story, 1 million-square-foot building at Market and Fremont streets, for approximately $200 million in January. The fund, controlled by Norges Bank Investment Management, picked up its second San Francisco property last month — a 49 percent interest in the 500,000-square-foot Foundry Square II complex on Howard and First streets in a joint venture with TIAA-CREF. Total price: $309 million.
“I’ve never seen space get absorbed this fast, rents go up this fast and whole buildings being pre-leased,” said Michael Covarrubias, chairman and CEO of San Francisco’s TMG Partners, whose recent developments include a $20 million, 200,000-square-foot office building under construction at Brannan and Fourth streets South of Market. TMG also has a 2 million-square-foot, mixed-use office, hotel and residential complex on tap at First and Mission streets, in the heart of the nearby Transbay center, some of whose developers ran into some rough waters with the city last week.
However that turns out, much is at stake, literal fortunes in fact, for investors and developers vested in the hottest part of the hottest real estate market in the country.
“It’s a really interesting time for San Francisco, there’s a lot of attention on this market,” said Caroline Rooney, managing director for capital markets and Northern California research at global real estate broker Cushman & Wakefield.
And getting increasingly frantic.
Leasing activity and building occupancy are at record levels. In its third-quarter San Francisco report last week, Cushman counted “a mere” 13 Class A “Big Block” (minimum 50,000 square feet) office buildings available, compared with 31 at this time last year. Rents per square foot for the upper floors of San Francisco office towers are the highest in the world, having increased by 60 percent since March, according to Knight Frank, a London real estate consultancy. The city’s office rents in general will continue to grow by more than a third over the next five years — again topping the world — in Knight Frank’s estimation based on a survey of 15 major cities (including London and New York).
No guesses as to the chief reason: It’s the the city, says the firm, “with the most tech exposure.” Which means interested parties better move fast, as Cushman & Wakefield, having squired attendees at TechCrunch Disrupt SF on a bus tour of local tech companies this month, well knows.
“The competition for buildings is incredibly strong,” said Rooney. “Well-capitalized investors — foreign buyers, REITs (real estate investment trusts) and pension fund advisers are looking to take advantage of the rising rents and the tightening market and are aggressively buying properties here.”
Among the pension funds looking to take advantage is the California State Teachers' Retirement System, which just invested $200 million with Jamestown Premier Property Fund, an Atlanta real estate investment and management firm, which will focus the system’s money, according to an e-mail it sent to the Registry, “on coastal regions that have strong vibrant job markets.”
Like San Francisco, where Jamestown Premier Property owns Ghirardelli Square, an office office building at 799 Market St., whose tech tenants include Akamai Technologies, Prism Skylabs and Monster.com, and Waterfront Plaza, a 300,000-square-foot complex on the Embarcadero it acquired for a reported $88 million last month. Two months earlier it sold the Pacific Place mixed-use complex — in which Intuit takes up all 200,000 square feet of office space, and other tenants include Levi’s, Old Navy, the Container Store and the Palomar Hotel — for $415 million to JPMorgan Asset Management.
Paramount, which owns, at last count, 16 other properties in high-priced Manhattan and Washington, is reportedly looking at a $2.7 billion IPO, the biggest ever for a REIT.
With the Rockefeller Group having sold 50 Beale Street to Parmount for $90 million more than it paid for the building just two years ago, the San Francisco will probably look good during Paramount’s road show.
“San Francisco is the best, strongest office market in the country at the moment,” said Robert Gadsden, portfolio manager atAlpine Woods Capital Investors, commenting on the IPO on Bloomberg last month.
With such endorsements, what could possibly go wrong? “Unless there’s some sort of black swan event, we see nothing on the horizon right now — nothing in the stock market or the stock economy — that gives us concern,” said Rooney.
“This is the most intense recovery with sustainability that I’ve ever seen,” said Covarrubias. “That doesn’t mean there won’t be washouts,” he added, referring to previous dot-com crashes and their impact.
“But there’s more long-term leasing, with companies not taking more space than they need, better, more seasoned management, and they’re making money.”
Vladimir Bosanac, co-founder and publisher of The Registry, is more cautious. “The levels of activity seem unprecedented. The feedback we've heard is focusing more on how long this will last instead of how much higher the prices will go. The prices are near or at peak levels,” he said.
“A big test will be if a company of significant size decides to return the real estate it does not need to the market. Some companies will not make it or they will be acquired. So if the market suddenly has half a million square feet of space available, it may send shock waves throughout the community.