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Shorenstein selling office space in S.F.
Proposed sale of its stake in Market Street towers, Hills Plaza could signal a revival for downtown commercial property
By Dan Levy - The San Francisco Chronicle
May 21, 2004 - Shorenstein Co. is selling about 1 million square feet of prime office space in the Financial District, a sign that commercial property sales may be taking off again in San Francisco.
Shorenstein, the city's biggest landlord, with about 7 million square feet on its books, is selling its ownership stake in 425 Market St., 333 Market St. and the Hills Plaza complex on the Embarcadero.
"Our investment strategy has been to add value to the assets we buy, stabilize the leasing and then sell them when appropriate," Doug Shorenstein, chief executive of the company, said Thursday. "We have a number of properties that meet those criteria."
Walton Street Capital has offered about $148 million for two-thirds of the
425 Market St. building held by Shorenstein, IBM and Fremont Properties, a real estate source said.
Wells Fargo is under contract to buy the entire 333 Market St. building from the same partners. The imposing Market Street towers were developed by Shorenstein and completed in the 1970s.
Hills Plaza is a former waterfront coffee factory that has been transformed into a mixed-use project of offices, shops and condominiums.
Real estate experts said that given its dominant place in the market, Shorenstein's decision to sell could be a harbinger for San Francisco property sales.
Sales have lagged in the four years since the tech crash.
"There has been some momentum on the investment and sales front, but Shorenstein would give more impetus to that," said Joe Cook, head of the Cushman & Wakefield services firm in San Francisco.
According to Real Capital Analytics, a New York research firm, investors poured $34 billion into real estate in 2003. So far this year, the number is
$16 billion.
"There is a lot of pent-up demand wanting to place capital in Northern California buildings," Cook said. "Real estate remains an attractive investment with all the ups and downs in the stock market."
The three buildings being sold encompass more than 2 million square feet among them, but Shorenstein's partial ownership in the Market Street buildings means that it is actually selling about 1 million square feet of space.
That's about the same amount of space that was sold during all of last year in San Francisco. About 1.25 million square feet traded hands in 2003, according to the Grubb & Ellis services firm.
Jacques Ducharme, head of the Julien J. Studley Inc. office in San Francisco, speculated that Shorenstein was simply taking advantage of market conditions.
"This is a seller's market, and they may have wanted to push the risk of uncertain rents off to the next buyers," Ducharme said. "There's still a lot of risk of where rents are going in San Francisco."
Average downtown rents today are less than $30 per square foot, a dramatic decrease from their dot-com-era highs of $80 per square foot.
With about 16 million square feet of office space sitting empty throughout the city, some people say rents could fall further.
But Shorenstein said the decision to sell was made because the properties had attained their maximum value to the company. Plus, Shorenstein wants to get away from the general partnership structure that had owned the buildings.
"What we are doing is selling and moving our equity into our fund format, "
Shorenstein said. "That means we can totally control our deals. And in this capital market, we will be a net seller."
The funds, seven since 1992, have been used to buy and sell office buildings around the country. When the buildings are fully upgraded and leased, the company sells.
The company's latest fund has about $1 billion for real estate acquisitions.
Joseph Hurd, an economist with the UCLA's Anderson Forecast, said there may be a lot of demand for office buildings, but investors will have to be patient.
"If you've got a deep enough wallet, you can go some years where your rents don't cover your investments," Hurd said. "You'd be thinking for the long term, not for short-term profits."
Shorenstein, sensitive to concerns that he is selling a good chunk of his San Francisco portfolio, said the company remains committed to its hometown.
"I don't want people to look at these deals and say we are exiting this market," Shorenstein said. "All we're doing is executing our strategy. We hope to buy other buildings in San Francisco."
In the market
Shorenstein Co., the city's biggest landlord, is selling 1 million square feet of San Francisco commercial property:
- Hills Plaza -- 610,000 square feet of office and retail space. The complex includes 67 condominiums. Shorenstein paid $113 million for the property in 1994.
- 425 Market St. -- 905,000 square feet of office space. Developed by Shorenstein, completed in 1973. Walton Street Capital has offered about $148 million for two-thirds of the building held by Shorenstein, IBM and Fremont Properties. Met Life holds the remaining third.
- 333 Market St. -- 632,000 square feet of office space. Developed by Shorenstein, completed in 1979. Wells Fargo is under contract to buy it from partners Shorenstein, IBM and Fremont Properties.
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