July 28, 2009
RREEF was an aggressive acquirer of Silicon Valley real estate over the past several years. The acquisition spree began in earnest when RREEF acquired a large tract of R&D buildings in Silicon Valley from Equity Office. Following up that was the massive acquisition of the Peery/Arrillaga portfolio in 2006. The portfolio consisted of some 5M square feet of Office and R&D product in Silicon Valley built and amassed over the years by Dick Peery and John Arrillaga over the years. RREEF and GE Real Estate acquired the portfolio for some $1.1 Billion.
When RREEF acquired the assets, the portfolio was about 2/3 occupied. From a quick glance of RREEF’s available space, it seems the vacancy levels today remain at similar levels. Except what is missing is that the development market is gone, and there is continued pressure on vacancy rates to rise, and rents to fall. The price paid for the portfolio simply cannot be substantiated.
In fact, the overall portfolio was acquired for some $200 psf. Many of the buildings, which are sitting vacant today, are worth no more than $100 psf, and some likely as little as $50 psf.
Peery/Arrillaga really did a bang up job – they built buildings which they rented out for 80-90% of their (the buildings, not P&A’s!) useful lives, and then disposed of them as though the buildings were what the market wanted. The fact of the matter is that the RREEF portfolio consists, for the most part, of 1-2 story buildings that a large number of tenants simply are not interested in as they are dark, tired, and in need of extensive redevelopment or improvements.
RREEF was likely banking on the market to cooperate and help support a redevelopment effort of some sort, but that market will be lying flat on its face for years to come. As a result, we’ve heard that the debt on the project is “nervous” and that portions of the portfolio may end up back in the lender’s hands.
This news would not bode well for RREEF, who is also hurting on the Sunnyvale Town Center project, the JV with Peter Pau’s Sand Hill Property Company in Sunnyvale where RREEF is the major partner in the deal. That project has halted construction as financing for the deal has dried up.
- RREEF Portfolio Sale Moving Forward
- Stockbridge Seeking Deal To Takeover Fund That Acquired Peery/Arrillaga Portfolio
- NAILED: Sunnyvale Town Center
- Weakness in Rents Beginning to Show
- RREEF America III Overview