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REA
November 29, 2017  

Brookfield Snags Office Complex in San Jose

Brookfield Asset Management has agreed to pay $128 million for a downtown San Jose office property, making a value-added bet on the city’s urban revitalization.

The two-building complex, Towers @ 2nd, encompasses 412,000 square feet of space that is 65% leased. The marketing pitch was that in addition to leasing vacant space amid growing demand, a buyer could raise rents, currently 22% below the market level, as leases roll over.

Toronto-based Brookfield is acting via a $9 billion opportunity fund, Brookfield Strategic Real Estate Partners 2. CBRE is representing the seller, a partnership between Dallas-based Invesco Real Estate and Harvest Properties of Emeryville, Calif.

The agreement caps a solid play by Invesco and Harvest. They acquired the property from SteelWave of Foster City, Calif., for $62.2 million in 2015, when the occupancy rate was only 50%. The duo then pumped $11.1 million into renovations and landed a major tenant. New York-based WeWork, which chose the property for its first Silicon Valley shared-workspace location, took over 73,000 sf of space last year under a 15-year lease.

Other tenants include California Newspaper Partners, which leases 33,000 sf for the headquarters of the San Jose Mercury News; Environmental & Occupational Risk Management (13,000 sf), Dealer CMO (11,000 sf) and Excel MSO (11,000 sf).

The larger building, with 215,000 sf, is at Four North Second Street. That 13-story property, developed in 1972, is 52% leased. The other, with 196,000 sf, is at 75 East Santa Clara Street. Completed in 1974, that 14-story building is 79% leased. Each has an underground garage. The complex is two blocks from City Hall and a few blocks from the campus of San Jose State University.

The marketing campaign emphasized that San Jose’s downtown is on the cusp of a massive transformation as more technology firms move in. Google and Dallas developer Trammell Crow are talking with the city about a potential 8 million-sf mixed-use development on 240 acres surrounding the San Jose Diridon train station.

Also, voters last year approved a sales-tax increase to raise billions of dollars for infrastructure improvements, including $1.5 billion to expand BART rail service via a subway beneath Santa Clara Street. The downtown station on that line would be adjacent to Towers @ 2nd. A light-rail line already runs past the property.

The downtown area, which long had been a 9-to-5 neighborhood, has already made some progress in pivoting toward a “live-work-play” community attractive to young workers and their employers. Since 2000, 3,771 multi-family units were built downtown, with nearly 60% completed in the past two years alone. Another 2,100 units are under construction, and there are plans for hotels and other commercial development in the area.

Downtown San Jose’s 10.9 million sf of office space was 89.4% leased at the end of the third quarter, according to CBRE. Asking rents average $40.44/sf, up 70% over the past four years.