Rreef expects rich return on 20-building sale

Tag : silicon sand

Twenty Silicon Valley research and development buildings acquiredtwo years ago as part of the valley's largest property sale areback on the market. The sale could establish a new benchmark forlocal values.
The seller, Rreef, is expected to select a buyer by mid-month fromthe pool of finalists. Between six and 12 bidders -- most poised topay cash -- sought to acquire the buildings from Rreef, accordingto a source with ties to the seller.
The global real estate and asset manager hopes to strike a deal forthe buildings at $100 million or about $250 a square foot in thenext two weeks, the source said.
That price is higher than current market levels and also above the$207 average price per foot Reef paid when it bought the 5.3million-square-foot Silicon Valley portfolio of Dick Peery and JohnArrillaga in spring 2006. The 20 buildings Rreef is now selling areall among those it acquired in that $1.1 billion transaction,billed as the largest property sale in the South Bay at the time.
Eighteen of the 20 buildings are in Sunnyvale with 11 of the 20clustered at highways 237 and 101, a generally attractive location;the other two buildings are in Santa Clara adjacent to Mineta SanJose International Airport. The portfolio is more than 80 percentoccupied and consists entirely of one- and two-story research anddevelopment buildings constructed from 1962 to 1985, according to acopy of the offering memorandum.
A spokesman for Rreef, John Gallager, said in March that the saleis part of a "normal strategy to harvest gains."
Rreef is also one of the valley's largest commercial propertyowners and may be looking to lighten its exposure. Its holdingsinclude offices, research and development buildings, andapartments. It is also a major investor in the ongoingredevelopment of Sunnyvale's downtown with Sand Hill Property Co.and Peter Pau. That project includes some 350,000 square feet ofoffices in addition to condominiums, apartments and a millionsquare feet of retail.
But given the dynamics in today's marketplace, generallyprecipitated by the dramatic pullback in credit markets, it is notat all clear that now is a good time to be putting property on themarket, especially if a seller has the luxury of waiting.
Jeremy Almand, chief investment officer for San Jose-based St.John's Capital Group, a real estate investment company withinterests largely outside the Bay Area, said it could be a goodtime to sell if you can do so at a decent price. But that does nottranslate into it being a good time to buy.
"I think it's a great time to sell because two or three yearsfrom now, I think values are going to be a lot less," Almandsaid. "I just don't see the cash flow being that great, andusually people in California have made their money on appreciation.
"In a lot of markets, the property values have fallen, and youcan buy with the idea that you're getting in well below thepeak," he said. He is not sure that Silicon Valley sellershave yet acknowledged such a fall.
Almand was not specifically addressing the circumstances of theRreef sale.
Rreef, which has offices in San Francisco, is a division ofDeutsche Bank. It is a well-known pension-fund adviser and investorwhose clients include the California Public Employees' RetirementSystem and the California State Teachers' Retirement System.
Jim Beeger, a senior vice president in San Jose for brokerageColliers International, said the Rreef portfolio benefits fromPeery-Arrillaga's reputation for developing well-constructedbuildings that typically lease more quickly than the market atlarge. Sunnyvale is also a central Silicon Valley location nearsome of the area's more affordable housing, making it attractive.
"If you are a cash buyer, it's a great time because there isnot as much competition, and sellers are looking for strongbuyers," said Beeger, who specializes in the R&D market.
But, brokerage CB Richard Ellis, which represents Rreef in thesale, reported July 1 that Silicon Valley R&D tenants in thesecond quarter returned nearly 350,000 square feet of space tomarket above what they leased. Asking rents across the valley wereflat compared to the first quarter, though up from a year ago.Sunnyvale and Mountain View turned in some of the valley's weakestleasing performances. Tenant demand and rental rates determine thefundamental value of any commercial building.
The sale of Silicon Valley R&D and industrial buildings hasdeclined precipitously in the last nine months, falling to $68million in the first quarter after peaking at nearly $500 millionin the final quarter of last year, according to Real CapitalAnalytics.

SHARON SIMONSON can be reached at 408.299.1853 orssimonson@bizjournals.com.