Two San Francisco Hotels Trade for $47.8M

By Noel Bigay, Costar Group

LaSalle Hotel Properties (LHO), a leading real estate investment trust company, acquired the Harbor Court Hotel & Hotel Triton, both located in San Francisco, CA, for $47.8 million. The company funded the transaction with borrowings from its Senior Unsecured Credit Facility.

The 131-room, Harbor Court Hotel is located at 165 Steuart Street in San Francisco’s financial district on the Embarcadero, and offers views of the San Francisco Bay. The building was originally built in 1926 and was extensively renovated and converted to a hotel in 1991.

The Hotel Triton is a 140-room hotel located at 342 Grant Avenue in the Union Square neighborhood of San Francisco. The building was originally built in 1912 and was converted to a hotel in 1991. In 2012, the property completed a guestroom renovation.

Hall Equities Lifts $23 Million at Walnut Creek Fitness Center*304.jpg

By Bianca Torres, Reporter, San Francisco Business Times

Hall Equities Group sold off a recently-built 24 Hour Fitness Super Sport facility in Walnut Creek for $23.08 million or about $529 per square foot.

The 43,602-square-foot building sits on 3.5 acres at 2800 North Main St. and houses 24 Hour as the single tenant with a 20-year lease.

The buyer is an unnamed local investor represented by Taylor Flynn of Marcus & Millichap.

Hall Equities, a Walnut Creek developer, wrapped up construction on the project earlier this year and 24 Hour moved in June. The developer has been busy lately with other projects including the 100-unit Arroyo Apartments in Walnut Creek and Saranap Village, a proposed mixed use project at the intersection of Boulevard Way and Saranap Avenue in Walnut Creek.

The tenant, based in San Ramon, operates more than 425 clubs in 17 states. The rent for the Walnut Creek center is $35.46 per square foot or about $1.55 million per year with a 10 percent increase every five years, according to a marketing brochure. The Super Sport Club includes an indoor pool and spa.

The property was marketed by Kase Abusharkh and Jacob Abusharkh of Sperry Van Ness Commercial Real Estate Advisors.

San Francisco’s Industrial Vacancy Decreases to 7.0%


By Bryce Meyers

The San Francisco Industrial market ended the second quarter 2013 with a vacancy rate of 7.0%.

The vacancy rate was down over the previous quarter, with net absorption totaling positive 440,708 square feet in the second quarter. That compares to positive 49,875 square feet in the first quarter 2013. Vacant sublease space decreased in the quarter, ending the quarter at 184,328 square feet.

Tenants moving into large blocks of space in 2013 include: The Exploratorium moving into 160,000 square feet at Pier 15; Metro Air Service moving into 43,500 square feet at 421 Valley Dr., and Twilio moving into 38,122 square feet at 645 Harrison St.

Rental rates ended the second quarter at $13.43, an increase over the previous quarter.

A total of one building delivered to the market in the quarter totaling 189,000 square feet, with 36,000 square feet still under construction at the end of the quarter.

This trend is compared to the U.S. National Industrial vacancy rate, which decreased to 8.5% from the previous quarter, with net absorption positive 44.6 million square feet in the second quarter. Average rental rates increased to $5.25 this quarter, and 167 industrial buildings delivered to the market totaling almost 17.5 million square feet.

Patrick Kennedy Sells Micro-unit Building for $7.5M*304.jpg

By Bianca Torres, Reporter, San Francisco Business Times

Developer Patrick Kennedy just sold his first San Francisco micro-unit project at 38 Harriet St. for $7.5 million or $326,088 per unit to FRE 398 LLC, a local investor.

The 23-unit building drew numerous offers including bids from overseas buyers after hitting the market in June. The winning offer came in $100,000 above the asking price.

The buyer is a husband and wife team who own 300 apartments in the Bay Area.

The deal comes with a five-year master lease with the California College of the Arts, which will use the units as dorm rooms.

“This buyer pool was really unique. We didn’t see the familiar buyers from traditional, rent-controlled buildings that we typically sell,” said Michael Thomas, a broker with CBRE, who represented Kennedy along with Toby Costello. “The sale attracted a lot of off-shore interest and people looking for ease of management.”

The project drew plenty of attention when it was completed last year because of the size of the units and site. The units are 295-square-foot studios that were built by Zeta Communities and assembled by Pankow Builders onto a 3,750-square-foot lot.

Some people debate whether encouraging micro units are good for the market, but Patrick Kennedy, head of Berkeley-based Panoramic Interests, has said they allow developers to build on small, in-fill lots and can help satisfy demand for housing in pedestrian-friendly neighborhoods.

Kennedy is already working on his second micro-unit project at 1321 Mission St. in San Francisco that will include 160 units in 11 stories. Unit sizes include 275-square-foot studios and 625-square-foot two-bedroom units.

Tishman Speyer Pounces on Another Downtown S.F. Condo Site


By J.K Dineen, Reporter, San Francisco Business TImes

A month after breaking ground on a $620 million, two-tower highrise project at 201 Folsom St., Tishman Speyer is already lining up its next downtown San Francisco housing development.

The New York-based developer, which is currently building office and condo projects in and around the south financial district, has purchased a multi-parcel residential development site on the 100 block of Folsom St., a parcel that could accommodate a 300-foot condo tower as well as two podium buildings, one 85 feet and one 50 feet.

The development, which will probably total about 400 units, would be Tishman Speyer’s third housing project in the south financial district area. The New York-based developer built the two tower Infinity project at 300 Spear St. and recently broke ground on Lumina, a 665-unit highrise complex that is being built with partner China Vanke at 201 Folsom St.

The 100 Folsom St. transaction closed on June 28th, according to public records. The seller of record was Martin C. Levin Investment Co. The site is currently a surface parking lot.

Developers had been chasing the Folsom Street parcels for years, but the deal was complicated by the fact that ownership group included three different family trusts not always in agreement about whether to sell. In addition, about 60 percent of the block is owned by the city and Tishman Speyer will have to acquire the city-owned parcel in order to do the development, according to Mike Grisso, senior project manager at San Francisco Office of Community Investment and Infrastructure.

Grisso said that his office is already in talks with Tishman Speyer.

“It has always been our intention to negotiate a sale of our parcel to whomever owns the other three,” he said. “We are looking at the redevelopment of the whole block. You need to develop them all together.”

The sale of the city-owned parcels can’t be finalized until the city finishes its long-range property management plan, which the state is requiring as part of the dissolution of redevelopment agencies. That plan is close to completion, Grisso said.

Kaiser Permanente Will Pay $55.2 Million for Mission Bay Office Site

By J.K Dineen, Reporter, San Francisco Business Times

Kaiser Permanante will be a property owner rather than a tenant in San Francisco’s Mission Bay.

The health care behemoth has agreed to pay $55.2 million to buy a parcel of land at 1600 Owens St., a property that is entitled for a 264,000 square foot building. The deal is scheduled to close in December, according to public reports filed by the seller, Alexandria Real Estate Equities.

The price gives a clear indication that the value of land in Mission Bay is on the rise. Kaiser is buying the property for more than $200 per buildable square foot. The land major comparable land deal in the neighborhood for a commercial development site was Salesforce’s acquisition of 14 acres. Salesforce paid $140 per buildable square foot for some of Mission Bay’s most prized waterfront parcels.

In its earnings report today, Alexandria stated that “ownership of the parcel was strategically important to the buyer and we will earn a fee to manage the construction of the building.”

The deal also will include “certain parking spaces,” although Alexandria doesn’t specify how many parking spaces will be sold as part of the package.

“It seemed a little like the good old days —one of those ideal quarters pre-Lehman Brothers when (Alexandria) was hitting on all cylinders,” said Alexandria CEO Joel Marcus during a July 30th earnings call.

San Francisco Business Times health care reporter Chris Rauber reported earlier this month that Kaiser had abandoned its proposed medical office building on 16th Street, a project that had raised the hackles of Potrero Hill residents who don’t want Mission Bay’s somewhat bland, institutional health care campus spilling across 16th Street into their neighborhood.

Instead, Kaiser will build at 1600 Owens St., a 264,000 square-foot building. The building, which will take about 18 months to construct, is part of the Alexandria campus that includes 1700 Owens St., 1500 Owens St., 1650 Owens St., and 455 Mission Bay Blvd. The building is being designed by STUDIOS Architecture.

The deal comes on the heels of a 97,000 square foot lease with Illumina at 409 Illinois St., which had sat empty since Alexandria bought the building two years ago. Alexandria purchased 409-499 Illinois St. from Shorenstein Properties and SKS Development for $290 million. The 409 building is leased to FibroGen.

Office Developers’ Confidence Spurs Rash of Building on Spec*304.jpg

By J.K Dineen, Reporter, San Francisco Business Times

Technology leasing may have cooled off a bit in the first half of 2013, but San Francisco’s office building developers are just warming up.

At a time when leasing velocity has slowed to a three-year low, a well-capitalized roster of institutional builders, both local and national, is roaring ahead with the biggest crop of downtown office buildings San Francisco has seen since the boom of the 1980s, which brought towers like 101 California St., 333 Bush St., 123 Mission St. and 50 Fremont St.

Approximately 2 million square feet of new or totally rehabbed office space is under construction, and developers are gearing up to break ground on 2.5 million square feet more, according to Jones Lang LaSalle. Of the six new developments that have broken ground or are expected to this year, five are being developed speculatively. Of the total development pipeline, 1.3 million square feet, or 30 percent, has been preleased.

At 350 Mission St., Kilroy Realty Corp. has started on a 444,000-square-foot building preleased to Salesforce. At 505 Howard St., Tishman Speyer is wrapping up construction on Foundry Square III, a 280,000-square-foot LEED gold mid-rise to be delivered early next year, while Boston Properties has started work on a 307,000-square-foot tower at 535 Mission St. Meanwhile, Jay Paul Co. has obtained a demolition permit at 181 Fremont St., where it will build a 400,000-square-foot tower with 75 residential condos on the top floors.

And at 101 First St., Boston Properties and Hines are going to start excavation this fall on the Transbay Tower, a 1.6 million-square-foot landmark that will be San Francisco’s tallest skyscraper. In the early fourth quarter, Kilroy will start on 333 Brannan St. — a six-story, 180,000-square-foot building meant to be a modern take on the 19th century brick and timber structures popular with technology tenants, said senior vice president Mike Sanford.

“It’s the kind of building you feel comfortable going spec on,” said Sanford.

Sluggish start

San Francisco’s leasing market remained slow in the second quarter, logging 131,000 square feet of positive net absorption as growing tech companies prepare to move into the vast amount of space they leased in 2011 and 2012, according to Jones Lang LaSalle.

For the first six months of 2013, tenants took 415,000 square feet more than they gave up. While the trends are positive, leasing is down 40 percent compared with the first half of 2012. In 2011 and 2012, the city saw 23 leases over 100,000 square feet in San Francisco. This year there haven’t been any.

The trend may be in part a result of rising rents. Rents have climbed to an average of $52 a square foot, up 71 percent since 2010, according to CBRE.

“There is a difference between doing a deal in the $30s or $40s and the $50s or $60s,” said Sanford. “When rents are higher, there is going to be more scrutiny so those deals take longer.”

Still plenty of tenants are out looking for space. There is currently 6.5 million square feet of active demand, a 7.7 percent increase from a year ago. San Francisco has added 7,400 jobs since the start of the year and now has an unemployment rate of 5.4 percent.

“It may not be as frothy as the end of last year, when you had companies like Square going from 30,000 to 300,000, but we still see strong demand,” said Mark McGranahan, a managing director with Cushman & Wakefield. “We are starting to see increased demand from law firms and financial institutions.”

McGranahan said that rising construction costs may also be giving pause to some tenants. “The biggest barrier is less about rent, but the capital budget required to move from building A to building B,” he said.

This is also a slow year for lease expirations, with just 950,000 square feet of existing leases over 40,000 square feet rolling over. In contrast, 2014 has 1.5 million square feet of roll over and 2015 will bring 3 million square feet.

To go or to slow?

Still some bullish developers could hit the pause button if leasing doesn’t pick back up. Tishman Speyer has indicated it would probably not break ground on the Foundry Square project until it has a tenant. Both Jay Paul’s 181 Fremont St. and Kilroy’s 333 Brannan St. will likely go this year, but Hines and Boston Properties could take a more cautious approach at the Transbay Tower. The excavation and foundation work will take a year, giving the developers an opportunity to reassess the market before going vertical, said Tony Natsis, a partner with Allen Matkins.

“At any point in time if they don’t think the market is cooperating they could go slower, without stopping construction,” he said. “On the other hand, it’s not a project that needs to hit the market in a particular cycle and they are going to own it forever.”

The deals done in 2011 and 2012 will continue to pay dividends for landlords in the second half of this year, said Julia Georgules, JLL’s research manager for Northern California. Yelp, Autodesk, Airbnb, Square and other startups will move into space leased last year, representing about 650,000 square feet.

In addition to new buildings, 10 major buildings are under renovation including One 10th, 680 Folsom St., 888 Brannan St., 155 Fifth St. and 140 New Montgomery St. Those four buildings represent 1.8 million square feet, 1.2 million square feet of which has been leased.

Jim Collins, vice president of leasing at Shorenstein Properties, said the firm is in negotiations with tenants at One 10th St., a 1970s building behind Twitter’s 1355 Market St. headquarters.

Georgules said any downturn would likely be mild compared with down cycles of 2000 and 2008. Tech companies are making sensible real estate decisions.

“These are companies with such wide user bases, with millions of members,” she said. “For the most part, they are being conservative about space and cautious about the IPO market. The impact of 4.5 million square feet of new inventory is not dire by any means.”