Commercial Real Estate Blog

Doug Linde, President of Boston Properties (NYSE:BXP), discussed on their second quarter earnings call the state of the various markets they are players in, amongst which are San Francisco and San Jose. He went into additional detail about the investment climate, as well as financing. Things to take away are that San Francisco demand for space is slow, valley market is being impacted by supply (interestingly he made mention of the Oracle/Sobrato tower), and that financing north of $100M is extremely difficult and that yield requirements to make deals pencil have shot way up.

Anyhow, here’s a transcript of his comments on the above:

Activity in San Francisco in the CBD continues to be pretty slow. There are really no large users in the marketplace for new requirements. Absorption in the second quarter was slightly negative but with a direct vacancy rate of under 9% and overall vacancy under 10%, the market still remains very tight.

There has been really no change in asking rents, so it’s our belief that the market for top space has settled out in the high 80s to low 90s. There continues to be modest organic growth from smaller firms, but there are no large requirements in the market other than those that are created by contractual lease expirations.

If you look at our occupancy statistics this quarter, you will see a reduction in occupancy in San Francisco. And that’s really from contractual lease expirations on tenants that we moved that happened to be in space in the third quarter, excuse me, in the first quarter, as well as in the first quarter, in both EC3 and EC4, and in the second quarter, they have moved out of EC3, and so you saw a decline in occupancy in EC3 this quarter.

The new development at 555 Mission, which is about 550,000 square feet, is rumored to have completed one additional lease on the top floor of the tower, sort of giving you a sense of what the top end of the market is, with average rents in the mid 80s bringing its leasing to about 30%.

The Valley continues to show job growth in the computer electronics and manufacturing sectors, where most new space requirements are really in the 15,000 to 70,000 square-foot range, i.e., smaller users.

Large user activity has moderated from the pace of the last six months, though Google has committed to build another 1.2 million square foot campus in Mountain View at Moffett Field.

New speculative development has come online, and it has led to an increased vacancy this quarter. In particular, a building that Oracle owned from BEA Systems is now in the market in San Jose, and that adds about 350,000 square feet of availability this quarter.

Just about everyone is being cautious about making decisions, and rental rate growth has slowed, and in some cases it has probably dipped 5% to 10%. But there is still incremental new demand.

Now let me shift my focus and make some comments about the financing markets before I turn things over to Mike, since they really are the key to understanding the acquisition market and individual asset pricing and where and when transactions can be accomplished. Read the rest of this entry »

Over the weekend, the fate of the GM Building at 767 Fifth Avenue became known. Boston Properties and Goldman Sachs led an investment group that acquired the trophy asset along with other buildings from Macklowe Properties for $4B, $2.5B of which was assumption of debt. It’s rumored that middle eastern investors and sovereign investment funds are part of the investment group.

This deal highlights a tough 15 month period for the Macklowes which saw them make a spectacularly large acquisition of 7 buildings from Blackstone, only to default on the loans associated with the acquisition and finally the disposition of a dozen buildings totalling nearly 10 million square feet to escape financial ruin.

The elder Macklowe, 70, took on a $1.2B bridge loan from Fortress Investment Group which was recourse (meaning that the Lender, Fortress, could come after the personal assets of Macklowe). Part of the group’s personal assets (assets outside the investment vehicle created for the acquisition) was the GM Building which is likely now the most expensive office building ever sold.

It seems that the younger Macklowe is taking over the family empire from his father, who twice, has risked much at the wrong time and cost the family dearly, losing significantly both in the early 90’s and now. Of course, it must be said that the elder Macklowe has made many right moves as well, including the acquisition of the GM Building in 2003 for $1.4B, which has subsequently doubled in value.

After many months of speculation and the fact that Macklowe went into default on the short term loans he took to acquire a seven building portfolio from Blackstone (some details here), Macklowe seems to have lined up some buyers for his landmark GM building (which is also home of the Apple “Glass Cube” Store), along with other properties he controls.

In February it was rumoured he retained CB Richard Ellis to market and solicit bids for his building, which at that time was said to be worth north of $3 Billion. It appears, according to the WSJ, that a consortium of Middle-Eastern buyers along with Goldman Sachs, and Boston Properties have lined up to acquire the trophy asset in a $3.6B deal which includes some other buildings and developable land. The value of the GM building is pegged at around $2.8B, several hundred million less than what it was hoped the building would fetch.

This sale, if it goes through, would help make its lender whole, but due to tax implications and the need to pay off the existing mortgage, might mean that Harry Macklowe might still come up a bit short and might have to dip into other “personal savings” or assets to fully remedy the loans that were taken out to acquire the buildings from Equity Office/Blackstone.

Just two days ago Mort Zuckerman, Chairman of Boston Properties, was quizzed on an earnings call what his take was about the Macklowe situation. His answer was:

“Let me give you a nice vague answer to that question. You know our history and we have always taken a look at premier properties, which may fit very well into Boston Properties’ portfolio, as [Mike] mentioned. [Lots] of quality, location, et cetera.

We also have a history of not commenting on transactions or potential transactions that are highly speculative until such time as we feel that there is something to say that’s really — that has substance to it. So, I don’t think we can speculate on what the pricing of the Macklowe Properties will be or anything else. I mean, they’re — it’s a complicated transaction for whoever makes it and we’ll see what happens.”

What this deal shows is that while the effect of lax lending standards and the subprime mess continue to sort themselves out on the residential side, we’re just beginning to see the effects of the same on the commercial side. Some are able to structure deals allowing them to get out from under assets, but we’ll undoubtedly be seeing more and more situations in which the lenders are essentially in control of the sale.

Oracle has put up its tower at 488 Almaden Blvd. on the market for sale. BEA paid about $335 per square foot for the building last year in hopes of moving workers from its north first street campus over but instead Oracle has decided to turn around and put the vacant building back on the market.

The 388,000 SF Class A building is located on Almaden Blvd. in Downtown San Jose. Built by Sobrato Development about 7-8 years ago at a cost of nearly $100M the property is on the market unpriced, though it is very likely that it will trade for below its replacement cost. The building was previous to BEA in play with NVIDIA, but that deal fell apart partly due to the economic incentive package not being sweet enough, and likely because the move from Santa Clara to Downtown would have represented a relatively cumbersome move from a logistics and personnel standpoint. NVIDIA instead acquired San Tomas Commerce Park across the street from its existing campus and intends on building a 2M square feet campus.

Read the rest of this entry »

KT Properties has acquired the property locatd at 1 South Market St in Downtown San Jose from Haury Properties. Plans for the site include high-rise condominiums but could be changed to office if the demand materializes. KT and its partners are currently developing the AXIS residential condo project located at Santa Clara and N Almaden Boulevard.

Haury originally had been holding the site for office development but later changed those plans into residential as the office market cooled.

The city seems to prefer that the 1 S Market site go office but it doesn’t make any sense at current rents Downtonw. Legacy is in the process of building the second tower at RiverPark on W San Carlos, and the BEA building is up in the air now that Oracle is acquiring them. In addition, Boston Properties and Barry Swenson control land downtown at a lower cost basis which could go office.

Boston Properties has closed on their purchase of North First Business Park in San Jose. The park is comprised of eight office and R&D buildings totalling 367,000 square feet on 24 acres of land. The seller was an affiliate of Goldman Sachs. The purchase price was $71.5 Million.

The property is bound by Zanker Road, Daggett Drive, and First Street. Boston Properties’s plans for the property are to redevelop the site into approximately 1.4 million square feet of Class A Office Space.

The park is mostly vacant and it is unclear when Boston intends on redeveloping the site, but it should be noted that a large number of parcels of property have changed hands in the North First Street area recently, and most of the properties include plans to redevelop into Class A office space. It will be interesting to see if the forecasts for Class A space demand will mesh with all the developers who intend on delivering millions of square feet of such space over the next 2-4 years.

Atmel is also currently marketing its headquarters and an adjacent 11 vacant acres of land for sale. The company likely intends on relocating into a smaller Class A headquarters environment somewhere along the 101 corridor in Santa Clara, San Jose, or Milpitas.