02/08/2012

AEW Marketing 650 California Street in SF

AEW Capital is shopping a trophy office building in San Francisco’s financial district.

The 492,000-square-foot tower, at 650 California Street, could attract bids as high as $250 million, or $508/sf. That’s a discount to the $300 million, or $609/sf, that the Boston investment manager paid when it acquired the property on behalf of a client in 2007, at the top of the market. Eastdil Secured has the listing.

At the estimated value, the initial annual yield would be about 5%, in line with the recent pricing for comparable top-tier office properties in the city.

The occupancy rate is 92%. But in marketing materials, AEW is playing up the fact that leases on 50% of the space roll over by 2016. If rents continue to rise in San Francisco, a buyer should be able to boost its return by renewing leases at higher prices. Major tenants include law firm Littler Mendelson (111,000 sf until 2016), Credit Suisse (62,000 sf until 2020) and advertising agency Goodby Silverstein (51,000 sf until 2017).

The San Francisco office market was hammered by the recession, which drove down the average occupancy rate below 85%. But some sections of the city are roaring back to life on the strength of the recovering tech industry. Several big-name tech companies have gobbled up space during the past year or so, including Facebook, which leased 1 million sf.

Much of the activity has occurred in the trendy South of Market neighborhood, whose occupancy rate has shot up to 96.6%, according to Jones Lang LaSalle. The central business district, where 650 California Street is located, has lagged behind, with an 88.2% rate. But local players expect that number to improve as available space runs out in South of Market. Overall, the average occupancy rate in San Francisco is 85.4%, according to Jones Lang.

AEW acquired 650 California Street from Arizona developer William S. Levine for a client, believed to be a UBS affiliate. Levine led a partnership that bought the property in 2000 for $160 million from Sarofim Realty’s Frontier 2 Properties Fund. Levine’s partner was a separate account that Pivotal Group of Phoenix managed for three Arizona pension systems. Levine bought out the separate account in 2005, after the property was unsuccessfully marketed. At that time, the building’s value was estimated at about $180 million.

When it was constructed in 1964, the 33-story tower, which is between Kearny Street and Grant Avenue, was the tallest building in California. Formerly known as the Hartford Building, it was developed by Hartford Insurance as its West Coast headquarters. AEW has spent $10 million on improvements.

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