Andrew Neilly
Gallen.Neilly & Associates
PH: 925/930-9848

By Dan Levy - San Francisco Chronicle

San Francisco, CA, - March 26, 2002 - From the 49th floor of the Bank of America tower, the chief executive of the Shorenstein Co. can survey some of the 6.5 million square feet in office space that has made his firm the dominant landlord in downtown San Francisco for years.

Now, after a decade of expanding the company's reach beyond the Bay Area to cities such as Chicago, Miami and Seattle, Shorenstein says he is finally poised to buy in the biggest city of all: New York.

"In the past, we've been priced out of Manhattan," Shorenstein said in a recent interview. "Today, we hope to find a decent building. We're looking at a couple of deals right now."

It won't be easy. Despite post-Sept. 11 worries that tall buildings may be targets for future terrorist attacks, competition for the Big Apple's marquee office properties remains as fierce as ever -- perhaps even more so, with the elimination of more than 10 million square feet at the World Trade Center and surrounding buildings. New York developer Donald Trump, Denver oilman Marvin Davis, real estate investment trusts, and funds run by investment banks Goldman Sachs and Morgan Stanley are all said to be circling the city in search of office properties. Last week, German investment companies agreed to buy two of the hottest buildings on the market after a bidding war that included more than 20 suitors, according to brokers.

A 500,000-square-foot office tower at 745 Fifth Ave. sold for $270 million and a 300,000-square-foot boutique building at 450 Park Ave. sold for $158 million -- staggering $540-per-square-foot and $525-per-square-foot costs, respectively. Brokers said the next trophy asset up for bid is likely to be a 339,000- square-foot office tower at 1370 Avenue of the Americas.

"You have to appreciate that there is limited product available and competition is stiff," said Tim Welch, executive managing director of Cushman & Wakefield real estate service firm in New York. "It's going to take an aggressive number to win the competition."

PRIVATE WAR CHEST
Fortunately for Shorenstein Co., it is armed with more than $600 million raised through a private partnership equity fund designed specifically for buying office buildings.

The fund, called Shorenstein Realty Investors Six LP, is similar to five previous private partnerships the company formed in the '90s to buy prime property around the country. The assets acquired include the 100-story John Hancock Tower in Chicago, the 55-story First Union Financial Center in Miami and the 39-story Energy Centre in New Orleans. Last month, the new fund made its first purchase, a 45-story Class A building at 500 W. Monroe St. in Chicago's West Loop, for $250 million.

That building, the firm's third major buy in the Windy City, has what Shorenstein says each of his company's properties must possess: a "leasing advantage" compared with other properties in the market. In other words, the buildings must have creditworthy tenants paying market rents, which provides an immediate cash flow to investors. The investment funds have been Doug Shorenstein's major innovation at a company that has long operated in the shadow of his 87-year-old father, Walter Shorenstein, who founded the firm in 1960 and built it into a business and political force in San Francisco.

"Everyone is fully aware that we could not have founded and created what Walter did," Doug Shorenstein said. "But we have taken what he created in a new direction. We now have a national platform, as opposed to a local company, that has access to unlimited capital to execute transactions. We can move into any market and make very large deals very quickly."

Shorenstein says the funds make his company "the private investment alternative to REITs" such as Equity Office Properties, Boston Properties, Sterling Equities Inc. and other publicly traded companies that own and manage tens of millions of square feet around the country.

NIMBLE CONTRARIAN
The advantage of remaining private, he says, is that the company can move counter to market cycles. It's the way Walter Shorenstein did business: When the market is hot, Shorenstein holds or sells property. When it's cold, the firm looks to buy.

"When everyone else was going public in '95 and '96, we were one of the large office organizations that did not," Doug Shorenstein said. "I didn't feel we would be able to execute deals on a countercyclical basis or have the absolute discretion over our capital sources."

Real estate observers say the Shorenstein record is very good.

"Their timing in and out of markets has been brilliant," said Robert Shibuya, Western regional vice president for Insignia/ESG, a national real estate services firm. "People who thought the institutional investors would have overtaken Shorenstein (in the '90s) have been proven wrong. They've had no problem raising capital and their returns have been well above the average."

Doug Shorenstein said the average return for the first five funds has been in the "mid-teens," a satisfying yield for his inherently conservative investors -- college endowments, foundations, high-net-worth individuals -- that are looking to preserve, not create, wealth.

Locally, the company has been the leading office developer in downtown Oakland. Even before Mayor Jerry Brown was elected and put economic development at the top of his agenda, Shorenstein Co. had been an active buyer in the city.

The company's City Center office and retail project, completed in 1990, has six downtown buildings near City Hall, federal offices and BART's City Center station.

But a big chunk of the seventh Oakland building, which opens next month, had been leased to Emeryville dot-com Ask Jeeves. The struggling company canceled its lease last month, leaving only 5 percent of the building leased. Shorenstein says the prospect of holding an empty office building does not concern him.

"We're in this business for the long term," he said. "With the other (City Center) buildings, the land cost was extremely low and we leased them pretty quickly. Oakland is a stable market. So if the new building takes a longer time to lease up, that's OK."

EXPANSION
Shorenstein Co., San Francisco's largest commercial landlord, has branched out from its hometown in the past decade, buying office properties in cities around the country.

1994:	First Union Financial Center, Miami, 1.2 million square feet
1997:	John Hancock Center, Chicago, 820,000 square feet, 49 floors of condominiums
1999:	Energy Center, New Orleans, 750,000 square feet
1999:	Washington Harbor, Washington D.C., 536,000 square feet
2002:	500 West Monroe St., Chicago, 952,000 square feet

Source: Shorenstein Co.

THOUGHTS ON THE SAN FRANCSICO MARKET
Shorenstein Co. chief executive Doug Shorenstein on local issues:

-- On whether San Francisco overbuilt during the dot-com boom:
"Not really, because there has been relatively little new Class A office space built compared to the '80s, when you had a huge amount of new building. . . . The sublease space will eventually work its way through the market in a year or so, and we'll be in a much more stabilized environment."

-- On South of Market real estate:
"Those buildings were warehouses for 100 years before they had five years in the sun as dot-com offices. They might be warehouses again for another 100 years. Or, it wouldn't surprise me if some of it ultimately was converted to housing."

-- On losing the Presidio development battle to George Lucas in 1998:
"Remind me never to get involved in a public process with no clearly defined process and no end date. . . . In retrospect, we're probably lucky that we didn't get it."

BY THE NUMBERS
Shorenstein Co. is the biggest commercial landlord in downtown San Francisco, followed by Equity Office Properties and Boston Properties, which are both publicly traded real estate investment trusts. Nationwide, the two REITs have significantly greater holdings than privately held Shorenstein.

SAN FRANCISCO

• Shorenstein: 6.45 million square feet
• Equity Office Properties: 4.5 million square feet
• Boston Properties: 3.9 million square feet .