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Morgan Stanley heads for Hills Plaza.
Shorenstein properties fetch $198M; Equity Office aced out
By Steve Ginsberg - MSNBC
August 1, 2004 - Morgan Stanley has put Hills Plaza under contract, outbidding Equity Office Properties and others with an offer of $198 million, which would mark the highest price paid for a San Francisco office property since 1999.
Neither Morgan Stanley nor Shorenstein Co., which announced its plans to sell the two-building complex in May, would comment. But sources close to the New York-based investment bank confirmed the offer, which represents $325 per square foot.
Meanwhile, tenants at the 345 Spear St. building say they have been issued "estoppel" certificates with Morgan Stanley's name on them. These documents require tenants in the building to summarize their lease payments for the prospective new landlord and typically precede a sale.
Morgan Stanley is buying Hills Plaza for a domestic client, the sources said, and was attracted because it believes San Francisco has hit a cyclical low. Hills Plaza has a solid tenant roster with little short-term or intermediate rollover. The investment banking giant believes Hills Plaza is in the "path of growth" and expects future improvement south of Market Street, yet no new buildings will be constructed in front of it to block its Bay Bridge and water views. The buyer also considered San Francisco one of the few 24-hour cities in America and wants to increase its exposure here.
Shorenstein is selling after holding the property since 1992 in its first investment fund. It wanted to close the fund and distribute the sale proceeds to its co-investors. The project is over 90 percent leased after Shorenstein filled a 200,000-square-foot hole caused by Gap consolidating to its new headquarters at 2 Folsom St.
Prepared to pay
After several years when few big San Francisco office buildings came to market, Hills Plaza is one of a handful that have been put up for sale in 2004 (see related story, Page 24.) While some market observers have predicted that several would fail to meet sellers' expectations and would be pulled off the market, Shorenstein's deal suggests buyers are prepared to pay top dollar.
Hills Plaza comprises two buildings, and 609,000 square feet that include the historic 2 Harrison St. and modern 345 Spear St.
Built in 1925 and serving as Hills Brothers Coffee Factory for more than five decades, 2 Harrison is a national landmark and architecturally unique with its Romanesque colonnades. At nearly 400,000 square feet, 345 Spear was designed as a companion piece, and the two mesh well on the 3.5 acre waterfront site. Located midway between SBC Park and Market Street, the buildings have had increased visibility since transportation improvements were made along the Embarcadero.
Gap remains an anchor on three floors, paying rent in the high $30-a-square-foot zone through 2010. Other key tenants include Babcock & Brown, Gensler and Bridge Housing. Sharper Image will relocate its headquarters there in 2006 in space formerly occupied by Internet company Critical Path.
Morgan Stanley has been in the real estate investment business since 1991, acquiring $30 billion worth of buildings globally. It has had a small presence in San Francisco but increased its presence here after its acquisition of Lend Lease Corp. last November. That deal increased Morgan Stanley's portfolio to over $40 billion. However, Lend Lease USA, which is developing the cruise ship terminal in San Francisco and building a 22-story condominium tower, is not associated with Morgan Stanley.
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