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SF Major Office Space Hits the Fan

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  • SF Major Office Space Hits the Fan

    S.F. has recession's 1st distressed office sale

    James Temple, Chronicle Staff Writer

    Thursday, July 2, 2009

    (07-01) 19:21 PDT -- San Francisco's first major distressed office sale of the current market cycle closed in recent days, providing an ominous sign of the growing pressures in the commercial real estate sector and a glimpse of how far values have dropped.

    An undisclosed U.S. private-equity firm bought the $40.8 million note on 250 Montgomery St. for about half its face value, according to industry sources. The sale was about 60 percent below the cost of the building, considering the previous price plus improvements.

    The owner of the Class A, or premier, office property, Lincoln Property Co. of Dallas, fell into default on the loan in recent months. It agreed to hand over the building to the new owner of the note in lieu of foreclosure, sources say.

    The 16-story, 116,000-square-foot building is more than half empty. The holder of the loan was Realty Finance Corp. of Connecticut.

    Industry watchers were keeping a close eye on the sale because they considered it a bellwether for the decline in office values.

    As a note sale on a half empty building, it's not a perfect example. But as the first major commercial sale in the city since last fall, when credit market convulsions dried up funding for large deals, it's the first real clue to local office values since the economy tanked.

    "It gives us a pretty good indication that all the discussions about plunging real estate values are not fiction," said Chris Seyfarth, a partner with Ernst & Young's transaction real estate practice in San Francisco. "It's certainly depressing news and it's certainly going to give other buyers something to point to and it's certainly going to complicate negotiations for anyone selling a real estate asset."

    Kurt Altvater of CB Richard Ellis, who represented the note-holder in the sale, and Daniel Cressman of Grubb & Ellis, who represented the unnamed buyer, both declined to comment. Lincoln Property didn't immediately return a call from The Chronicle.

    Financial distress has been percolating up the real estate food chain, with residential properties, small office properties and multifamily buildings following each other into default like dominos. Until now, the most notable example was the more than 20-property portfolio owned by the Lembi Group, one of San Francisco's largest apartment owners.

    The Montgomery Street building is likely to be just the first local Class A building to suffer this fate during the downturn.

    Nearly 75 percent of the premier buildings downtown traded hands in the past four years, activity that pushed sale prices to record highs and drove the ratio of rental income to cost to all-time lows. The rub is that the economic collapse has sharply reduced occupancy and rental rates, undermining the economics of those deals.

    More than 1.2 million square feet of office space has come back onto the San Francisco market so far this year, according to commercial brokerage firm Colliers International. The overall vacancy rate rose to 14.1 percent in the second quarter from 13.2 percent in the first. Rent for Class A space averaged $33.09 per square foot, a 12.4 percent drop from the first three months of the year.

    These factors could push U.S. commercial delinquency rates above 3.5 percent by the end of the year and as high as 6 percent in 2010, near the levels reached during the early 1990s, according to a forecast by Deutsche Bank.

    "Current rental rates do not support the debt service that was placed on commercial real estate in the previous two or three years," said David Klein, senior vice president with NAI BT Commercial in San Francisco. "Whatever equity the developers had going into the deals has just been eroded away by the failure of rents to meet their expectations."

    E-mail James Temple at jtemple@sfchronicle.com.


    http://sfgate.com/cgi-bin/article.cg...BUBL18H901.DTL


    Bay Area Com-Space Consolidations


    Bank of the West to move to Bishop Ranch

    James Temple, Chronicle Staff Writer
    Thursday, July 2, 2009

    (07-01) 18:49 PDT -- Bank of the West has inked easily the largest local office deal of the year, signing a lease for 240,000 square feet at Bishop Ranch that allows it to consolidate 1,600 employees now spread among seven East Bay offices.

    The San Francisco bank expects to move into the San Ramon business park by late next year.

    "The move to Bishop Ranch allows us to remain in the East Bay, accommodate future growth, enjoy greater efficiencies and provide our employees ... high-quality working conditions," Michael Shepherd, chief executive officer of Bank of the West, said in a statement.

    While the size of the deal is eye-popping, it's not an indication of improving office market trends, said Ed Del Beccaro, senior managing partner at Colliers International's Walnut Creek office.

    Bank of the West is just one of many companies nearing the end of their leases that are shopping around for space, often playing landlords off one another to secure the best price and driving down average rents in the process, he said.

    More notably, the Bishop Ranch lease represents a slight decline in the bank's total East Bay space and will come at a high cost to the markets where its offices are now located. The consolidation will leave at least 160,000 square feet of vacant space around Interstate 680, emptying the bank's main building at 1450 Treat Blvd. in Walnut Creek and single-handedly pushing vacancy near the Pleasant Hill BART station from 29 to 38 percent, Del Beccaro said. "It's going to have a ripple effect in terms of causing almost all trends to drift down further," he said.

    Terms of the deal, which don't affect the company's San Francisco headquarters, weren't disclosed.

    Only a handful of East Bay real estate deals have topped 200,000 square feet in recent years, said Erin Proto of brokerage firm Grubb & Ellis Co.

    Those include the approximately 235,000-square-foot Robert Half International consolidation, also at Bishop Ranch, and the California State Automobile Association's roughly 250,000-square-foot lease in Walnut Creek. The Robert Half lease was one of several deals with large companies that helped Bishop Ranch land more than 1 million square feet worth of tenants last year, despite a slowing office market.

    Ed Hagopian, executive vice president with property owner Sunset Development Co., said the transactions validate the office park as the location of choice for established organizations looking to relocate in the East Bay. He dismissed the notion that Bishop Ranch is merely outbidding other landlords on price, arguing that tenants like Chevron Corp., AT&T and Coca-Cola Co. are drawn to the property's amenities, location near the intersection of two major highways and plentiful nearby housing.

    "It's a rare light in a quiet real estate world," he said.

    E-mail James Temple at jtemple@sfchronicle.com.

    http://sfgate.com/cgi-bin/article.cg...BUBL18HARK.DTL
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