03/28/2012

Ohio Teachers to Pay Top Dollar for SF Tower

Ohio State Teachers has agreed to pay $240 million for Foundry Square 1, a fully leased office tower in San Francisco.

The price for the 334,000-square-foot property works out to a whopping $718/sf, reflecting the strong demand for core real estate in the city. The capitalization rate is about 5.5%.

The pension fund is buying Foundry Square 1 from AREA Property of New York. The building was part of a five-property portfolio that AREA assumed in 2009 after Morgan Stanley Real Estate defaulted on mezzanine debt.

The tower, at 400 Howard Street in the Financial District, is fully leased to BlackRock, the giant investment manager, until 2023. Eastdil Secured has the listing.

No San Francisco property of its size has traded for more than $700/sf since the real estate market hit the skids in 2007. But the city recently has seen a raft of offerings with sky-high pricing expectations. The optimism is being fueled by job growth in the technology sector, which is driving up occupancy rates and rents. While the average occupancy rate is still only about 85% city-wide, it has jumped to the mid-90s or higher in the most-desirable submarkets, such as the Financial District.

Foundry Square 1, which was developed in 2007, is part of a planned four-building campus that was designed for Sun Microsystems. But that company, since acquired by Oracle, never moved in.

Two of the other buildings Foundry Square 2 and 4 have already been constructed. Utah Retirement System put the 233,000-sf Foundry Square 4, at 500 Howard Street, on the market in February. Market pros think it could command bids of up to $185 million, or just shy of an eye-popping $800/sf. A GE Asset Management partnership owns the 504,000-sf Foundry Square 2, at 405 Howard Street. This month, Tishman Speyer of New York agreed to buy the site for Foundry Square 3 for about $50 million. It is entitled for a 230,000-sf tower.

Morgan Stanley acquired Foundry Square 1 and seven other San Francisco properties in 2007 from fund shop Blackstone for $2.4 billion. But when real estate values collapsed in 2009, Morgan Stanley was unable to refinance the $466.5 million debt package it had put on five of the properties, including Foundry Square 1. It then surrendered to AREA the keys for Foundry Square 1 and the four other properties: One Post Street (421,000 sf), 201 California Street (240,000 sf), 60 Spear Street (142,000 sf) and Bayside Plaza (85,000 sf).

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