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REA
April 29, 2020  

Amid Crisis, Deal Struck on San Jose Offices

CBRE Global Investors has agreed to purchase a recently completed office complex in San Jose from a PCCP partnership, in a deal reached after the area went into lockdown due to the coronavirus outbreak.

The price being paid for the two Class-A buildings, totaling 369,000 square feet, is around $535/sf, or just under $200 million. However, there appear to be seller credits being negotiated that could offset the price by as much as $15 million, and other complicating factors such as rent concessions that could play into the talks. The complex is about two-thirds leased.

Eastdil Secured marketed the property, which went under contract in recent weeks — after the coronavirus pandemic triggered shelter-in-place orders. That timing provides a glimmer of hope in a period when few big deals are getting done. However, the deal remains in due diligence without a non-refundable deposit for now, so market pros are cautious in their optimism that the trade will close.

The buildings are in the North San Jose submarket, adjacent to a planned Google campus. Expansions by big technology companies had been fueling a white-hot sales market in Silicon Valley. Last year, the average valuation on trades worth at least $25 million was 78% higher than at the last cyclical peak — the biggest jump of any major market nationally.

But the technology industry hasn’t been immune to the fallout from the health crisis. For example, Alphabet’s Google subsidiary announced this month it was slowing its hiring and cutting spending on recruitment, marketing and travel. The tech giant also recently abandoned a tentative deal to purchase a vacant, 10-building office/research complex in Mountain View, Calif. The 707,000-sf campus was the headquarters of Symantec’s enterprise-security unit before that business was purchased by Broadcom last year. Cushman & Wakefield marketed the property, which was expected to fetch $700 million, or just under $1,000/sf.

The buildings that Los Angeles-based CBRE Global intends to purchase were completed in 2016 and 2019 by a partnership between PCCP, also of Los Angeles, and South Bay Development of Los Gatos, Calif. When the complex hit the block in January, it was 64.5% occupied by three tenants with a weighted average remaining lease term of 9.8 years. Investors were told the lengthy lease terms would provide dependable income during the stabilization process. The rent roll includes Bloom Energy, which uses the property for its headquarters, and shared-workspace company Spaces.

The six-story buildings, each with 184,000 sf, are at 4353 and 4453 North First Street, just off State Route 237. Called 237@First, the complex has a LEED gold designation and amenities that include a volleyball court and fitness center.

The surrounding North San Jose submarket has 13.7 million sf of office space that was 90.3% leased at the end of the first quarter, according to a CBRE report.

Alphabet has acquired over 1.8 million sf of office properties in the vicinity for a Google campus, and 1.3 million sf of that borders 237@First, according to marketing materials. The neighborhood is benefiting from an influx of mixed-used development.