Commercial Real Estate Blog

Since Legacy Partners dropped its plans to acquire the 388,000 square foot Oracle Tower in San Jose, Oracle has had a bit of difficulty in rounding up another buyer. In fact, last week at the CoreNet/ULI event in Foster City, Randy Smith, the VP of facilities and global real estate for Oracle confessed that the building is proving more difficult than expected to sell.

Nevertheless, word is that a new buyer has been identified, and it is Sobrato. After developing the building early in the decade and watching it sit vacant for seven years, Sobrato offloaded the building to BEA for $130M in 2007. BEA was subseqently acquired by Oracle Corporation and Oracle put the building on the sale block in May of this year, and Legacy was reported in July to be in contract to acquire the asset for roughly $100M or about $275 psf.

Faced with a difficult (to say the least) lending environment, Legacy dropped its plans in August to acquire the building, and Oracle was back out in the market looking for a buyer, and it now seems that buyer could be Sobrato.

Based on the current state of the capital markets, an acquirer will either need significant pre-leasing to take place or have very deep pockets, and Sobrato certainly has the latter, and if the stars align they might even have both. The significance of the tower is that it represents one of only two large chunks of Class A office space in Downtown San Jose, with the other being Legacy Partners’ RiverPark Tower II project which is under construction. In addition, it represents an opportunity for a suitor to acquire the building well below replacement cost.

We previously posted on PriceWaterhouseCoopers requirement in downtown San Jose for some 150K square feet, and just the other day made mention of Sony’s 300-400K square foot requirement. We’ve also heard of at least two other 100K+ square feet requirements coming through the pipes. It will be interesting to see what Sobrato can pull off.

The Quadrus Office Project on Sand Hill Road is working its way to a sale. The project which features 8 buildings sprawled over twenty acres between 2400 and 2498 Sand Hill Road is owned by the Kaiser Family Foundation and home to numerous venture capital and private equity firms.

The property was the first office development built on Sand Hill Road and it last traded hands in the eighties when Saga Foods sold the campus to the Kaiser Family Foundation for $31,000,000. Since then, rents have soared and Kaiser has added some buildings to the project. Rents at the project are currently in the $11-12 full service (per month) range.

It’s not clear what the sales price on the project will be or who the buyer is, but the last comp for a sale on Sand Hill Road was for $1,000 per square foot when the 133,000 square foot (on 12 acres) Sand Hill Commons complex at 2882-2884 Sand Hill was sold to ING Clarion in 2006 for $133M. It should be noted that Sand Hill Commons is a more desirable project, and commands rents 10-20% higher than Quadrus.

The deal is still being negotiated, but timing of a sale could likely be good for Kaiser if it goes through. The last time the “Sand Hill Economy” faltered, vacancy rates on Sand Hill soared to over 15% and rents were halved. Whether that will happen again or not is unclear in this cycle, but what will likely happen is that the project will continue to be ground zero for the venture capital companies willing to pay top dollar rents for space.

Snell & Co. has acquired a +/- 90,000 square feet office building from Symantec, The three-story building is located at the corner of Torre Avenue and Rodrigues Ave in Cupertino. The building was delivered vacant.

We heard about this sale a few months ago when Snell & Co. tied the site up and was on the hunt for the financing and/or joint-venture partner it needed to conclude the deal. The word is that the sales price was right around $330 per square foot or $30M.

The building is a Class B+ asset, and can be fairly easily demised down into chunks of roughly 15K SF. Market rents for this quality space are in the $2.75 NNN range, with an allowance of $10-15 psf.  The new owners plan on upgrading the common areas, lobby, exterior, and elevator cabs. This building should clean up nicely, but the ceiling heights are a little low (8′-8′5″) to be considered quality Class A space and appeal to everyone. Cupertino is a historically strong market and currently benefits from single digit vacancy rates due to Apple’s voracious appetite for space.

Update: Another broker has emailed us and indicated that asking rents are $3.10 NNN at this project, and that they will demise the spaces down to about 5,000 SF. $3.10 is a fairly strong number for this asset, we’ll see if they can achieve that.

Verisign, Inc. (NASDAQ:VRSN) is in contract to sell approximately half of its 290,000 SF headquarters in Mountain View, California. They are under contract to sell 675 and 685 East Middlefield Road for approximately $49M ($308 psf). The two buildings constitute about 159,000 SF, which is a bit more than half of the entire headquarters of 290,000 SF.

Verisign purchased the building in October of 2001 from Sobrato for about $120M in 2001 ($750 psf). A copy of the original PSA is available here. They purchased the building to get out of a 10-year lease agreement they signed in October of 2000. That lease agreement had a start rate of $7.50 NNN (per month). A copy of the original lease agreement is available here.

As part of the deal, the buyer which is PR III Middlefield Road, LLC, will lease back the facility to Verisign for a period of 2.5 years, with an option to extend for an additional five. The lease will start at approximately $2.50 NNN.

The project is across the street from Dostart Development’s 690 Middlefield Road project, which is a 340,000 SF Leed Silver Class A project going up on 15.6 acres it acquired from Hewlett Packard last year for about $60 psf (land cost). That project is being marketed at $3.65 NNN with a $35 allowance over a warm shell.

Both buildings benefit from a light rail station within the immediate walking area, though Verisign’s building will require fairly significant improvements to get them to Class A status.

Though likely not surprising to anybody, year over year investment sales both in the United States and on a worldwide basis are down dramatically. According to a Jones Lang LaSalle (NYSE:JLL) report cited by NREI, first quarter investment sales in the US came in at $39.2 Billion, a number which is down 69% from the year ago period.

Internationally, investment sales during the first quarter were $154 Billion, which is down 46% less than the $283 Billion number from a year ago. This statistic was provided by Real Capital Analytics.

There is a lot of money currently waiting on the sidelines to acquire assets, but for the time being sellers are not conceding much on price. That might change though over the course of the next one to two years as loans mature. As Macklowe Properties found out, refinancing a short term loan in this market is difficult to do. If owners don’t can’t meet the heightened equity requirements currently facing those looking to acquire or refinance assets, they might be forced to sell.

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.

Divco West has finally sold the Park Center Plaza mixed-use complex in San Jose. The complex, which primarily consists of office space was sold to BPG Properties of Philadelphia for $169.5 Million.

The complex was acquired by Divco West through two transactions in 1998 and 1999 for approximately $110 Million.