Investment firm Starwood Capital Group has sold 33 prime office properties totaling 3.3 million square feet in San Diego; Portland, Oregon; and Raleigh, North Carolina, to a Singapore-based developer in its first foray into U.S. real estate investment, according to sources familiar with the deal.
Starwood Capital had been quietly shopping the portfolio with New York brokerage Eastdil Secured and accepted an offer from Ascendas-Singbridge Group, a developer and investor jointly owned by Singapore state-owned real estate companies Temasek Holdings and JTC Corp., said the sources, who are not authorized to publicly discuss the transaction.
In a brief release that did not mention Starwood, Ascendas-Singbridge said Friday it plans to expand within the U.S. and is opening an office in San Francisco to provide support for asset management, business development and other related services.
Ascendas-Singbridge manages more than $14.6 billion in global assets, predominantly in Asia and Australia. According to its website, Miguel Ko, the current executive director and group chief executive of Ascendas-Singbridge, is the former chairman and president of Starwood Hotels & Resorts, Asia Pacific Division.
The discussions come as the group and parent company Temasek also aim to buy into the lucrative North American shared workspace market as part of a $45 million investment in Breather, a flexible workspace provider.
Sources in Los Angeles, San Diego and Portland said the portfolio includes most of Starwood Capital’s office holdings in San Diego and the Portland suburb of Beaverton, Oregon, plus properties in North Carolina.
The portfolio includes a heavy concentration of office and flex properties in the Rancho Bernardo and Sorrento Mesa areas of San Diego, home to many technology and life science companies, a source said.
Starwood acquired 12 San Diego buildings in 2014 totaling more than 1 million square feet in Rancho Bernardo and Sorrento Mesa from Los Angeles-based developer Kilroy Realty Corp. for $295 million, according to CoStar data. The properties, mostly built between 2000 and 2006, include six office buildings and a flex building at an office park in Rancho Bernardo known as Innovation Corporate Center, a source said.
The San Diego properties being sold also include the three-story, 318,000-square-foot Pacific Corporate Center at 10020 Pacific Mesa Blvd., occupied by medical device maker Becton, Dickinson and Co., and several buildings at Sorrento Mesa’s The Campus at Sorrento Gateway, the source said.
The bulk of Starwood’s current Portland portfolio is comprised of office and flex buildings in Beaverton acquired from Glendale, California-based PS Business Parks Inc. Starwood purchased 25 low-rise buildings, ranging from 16,500 to 65,500 square feet each from PS in October 2014 for $164.1 million, according to CoStar data. Most were built in the 1980s and 1990s.
Eastdil and Ascendas-Singbridge did not immediately return calls or emails requesting comment on the transaction. Starwood Capital didn’t immediately comment.
The portfolio purchase is the first major real estate investment in North America for Ascendas-Singbridge, which has properties in 28 cities in Australia, China, India, Indonesia, Singapore and South Korea. The group, under its subsidiary Ascendas, manages three Singapore exchange-listed funds, including Ascendas Real Estate Investment Trust, Ascendas India Trust and Ascendas Hospitality Trust. Ascendas-Singbridge also manages several private real estate funds.
The move by the online retailer could have significant implications for industrial property sales, which outperformed other major commercial sectors across the U.S. in the second quarter as Amazon and other companies pump up their supply chains for e-commerce delivery, according to CoStar data.
“If you really read between the lines here, and kind of analyze this, Amazon wants to be part of every single transaction that happens in our lives,” said Gregory Healy, senior vice president of chain and logistics at Colliers International.
Amazon, the world’s largest retailer, bought PillPack in late June for an estimated $1 billion. PillPack holds pharmacy licenses in all 50 states and ships medications from its primary drug distribution center in Manchester, NH, to customers who take multiple daily prescriptions. The company is targeting a major market: On its website, PillPack says 40 million adults take more than five prescriptions each day.
The company may need new buildings for an online pharmacy, the analysts said. Though Amazon is opening fulfillment centers at a dizzying rate — eight so far in 2018 — it has a host of controls to ensure each center operates at maximum capacity and has little extra space, the company said in its 2017 annual report.
“How do you keep people out of the doctor’s office or hospital lab? Make sure people take their prescriptions,” he said.
Healy said the purchase could have implications for any brick-and-mortar plans Amazon has as well, noting the trend toward small, walk-in clinics across the country. It’s estimated there are now almost 3,000 such clinics, according to Accenture. He also speculated that Amazon could add pharmacy services to its Whole Foods stores.
Tech CRE News: Will Facebook Stock Plunge Hurt Bay Area?
Other economists worry that the drop in price could indicate a pending correction in the market. However, with Amazon’s massive increase in Q2 earnings, it may be too early to predict if Facebook is suffering from an overall market dip, or its own public relation woes.
The deal announced this week that private equity firm Stone Point Capital plans to buy Sabal Capital Partners, a small-balance, multifamily lender and loan servicer, is only the latest maneuvering in the shifting landscape for special servicing of commercial real estate loans. More deals are likely as a projected rise in interest rates may boost distress in the market.
Special servicers control the fate of billions in distressed loans and thus the fate of billions in commercial properties. And right now, that is a lucrative market flooded with capital but with fewer investment opportunities capable of providing the higher returns expected from private equity investors.
The jockeying for position is not only indicative of billions of private equity money flowing into distressed assets but also shows where the market is heading.
Driven in part by retail weakness, the volume of loans in commercial mortgage bonds on servicers’ “watch lists” has been on a gradual upswing since last November, according to Morningstar Credit Ratings data. Loans are put on a watch list because of issues such as declining occupancy or net incomes at the properties backing the loans. The rise in volume is considered a reliable indicator of future distress.
The maneuvering is not done, with a prize still to be had. One of the three largest commercial loan special servicers in the market, Rialto Capital Advisors, is still in play. Its owner, homebuilder Lennar Corp., has hired financial advisers to determine Rialto’s strategic alternatives as Lennar shifts to concentrating purely on residential building.
Three of Rialto’s larger competitors are owned by bank holding companies, PNC Financial Services Group owns Midland Loan Services, the largest special servicer in the market; and the second- and fifth-largest are Wells Fargo and KeyBank.
Notably, Wells Fargo is one of the two financial advisers Lennar hired to consider what to do with Rialto. The other adviser is Deutsche Bank.
The fourth-largest special servicer, CWCapital Asset Management, was acquired six months ago by Japanese multinational holding conglomerate SoftBank Group.
Distressed property purchasing is one of the country’s hottest investment categories and the primary target of new investment dollars. At a time when core property prices have hit new peaks, yield-hungry investors are aggressively sourcing new investment opportunities that offer more compelling returns.
Private equity funds raised $14.7 billion alone for value-add and opportunistic commercial real estate last quarter, according to private equity data provider Preqin.
About 75 percent of the new investment money being raised in the market is targeting value-add and opportunistic real estate, the categories that distressed assets fall into, said Chris Lee, vice chairman of CBRE Capital Markets Group based in Miami.
Lee directed one of the largest distressed deals of this year. CBRE, in conjunction with Ten-X, arranged the sale of a foreclosed upon leasehold interest in 110 E. Broward in Fort Lauderdale in January for $41.06 million. Stockbridge Capital Group acquired the 24-story office tower and an adjacent two-story office and retail pavilion. LNR Partners was the seller as special servicer for owner CMBS trust.
At the time of the sale, 110 E. Broward was only 42 percent leased at the time, representing a value-add opportunity by the lease-up of 198,803 square feet of vacant space in a market where the competitive set vacancy is just 8 percent.
In this environment, banks and servicers have had little trouble liquidating the distressed assets. So, the problem for Lee and other brokers is finding inventory right now to sell. The amount of distressed assets in the market at the moment is at post-2008 recession lows as the recovery is now approaching 10 years running.
The amount of foreclosed commercial properties on bank books had shrunk to just $4.7 billion in the first quarter from $31.2 billion seven years ago, according to Federal Deposit Insurance Corp. data.
The amount of specially serviced loans in commercial mortgage-backed securities has fallen by $70 billion in that time, down to about $23 billion.
The diverging trends of money coming in and assets available for liquidation has created a lot of jockeying among special servicers for the dwindling supply of deals. Wells Fargo Bank, PNC’s Midland Loan Services, Rialto Capital and KeyBank have grown their market share in the past two years at the expense of CWCapital Asset Management and other smaller servicers.
Of those loan balances assigned, the amount of distressed loans being actively serviced is small, about 2.4 percent. At year-end 2017, Rialto’s active special-servicing portfolio contained 364 loans and 481 real estate owned properties with a combined unpaid loan balance of $1.98 billion, according to Morningstar Credit Ratings.
In advance of any decision from Lennar about Rialto’s fate, the special servicer has also been particularly active in the past two months growing its special servicing assignments.
Another arm of Rialto has been one of the most active buyers of B-piece commercial mortgage bond offerings. That affiliate has underwritten and purchased over $6.1 billion in face value of such bonds in 88 different securitizations.
B-piece buyers generally purchase the lowest-rated and the very bottom of the bond classes — the unrated class. Any losses to the bond trust come out of the lowest-rated bonds first.
Because of that, B-piece buyers have the right to play an active role in making decisions on important issues that can affect the value of the loan or the collateral. That includes such issues as identifying what collateral goes into the offering and having first-purchase options on defaulted loans or, in this case, appointing new special servicers.
In the past two months, the Rialto affiliate has removed the existing special servicer on 11 different commercial mortgage bond offerings in which it has invested and replaced them with Rialto Capital, according to bond rating agency announcements. Rialto has taken assignments away from Midland Loan Services and CWCapital.
Such removal and replacing of special servicers is not unusual. CWCapital has also won such assignments in the past two months. However, the number of such switches involving Rialto has been much higher than for the others.
Executives from neither Rialto nor Lennar responded to requests for comments for this story.
Calco Commercial has recently sold both the 260 Shipley Street & 969 Folsom Street buildings. 260 Shipley Street is a two-story 3,750+/- square foot commercial building located in the SOMA with second floor office & ground floor warehouse. The property features skylights, private conference room, and a kitchenette in the office area and a drive-in roll-up entry for the warehouse.
969 Folsom Street is a 8,150+/- square foot commercial building located next door to 260 Shipley Street in the SOMA. 969 Folsom Street features 7,300+/- square feet of warehouse area with one drive-in loading door and 850+/- square feet of office with open and private areas and a kitchenette.
Calco Commercial specializes in the leasing and selling of commercial, office, industrial and NNN properties in and around San Francisco. If you have any questions about how to best re-position your asset in the Bay Area market, are a Tenant looking for space or have general market questions, call our office at 415.970.0000 and we can provide expert service.
With office vacancy rates looming shy of 5% in the South Financial District Submarket, Google has just leased approximately 57,000+/- square feet at 2 Harrison Street in the Hills Plaza. According to The San Francisco Chronicle, Google now occupies “400,000 square feet” at the Hills Plaza complex, with a total of “1 Million square feet of leased and owned” properties in San Francisco.
San Francisco office rents are currently averaging $61.51 per square foot according to Costar, and with tech giants like Google snapping up large swaths of office space, vacancy will continue to decrease, possibly forcing rents up for the rest of the office market.
Los Angeles’ Kilroy Realty Corp. has closed on its $308 million acquisition of San Francisco’s life science development site Oyster Point from a development group led by China’s Greenland USA, the company announced today.
The 40-acre industrial site, entitled for 2.5 million square feet of development, spans the waterfront in South San Francisco.
The sales price provides an 80 percent return for Greenland’s group, which has done some demolition work since buying it fully entitled for $171 million two years ago from Shorenstein Properties and SKS Partners.
In recent years, the South San Francisco region’s commercial biotech market has expanded to more than 12 million square feet of office and laboratory space across more than 500 acres, accommodating a range of entrepreneurial start-ups and established companies such as Amgen and Genentech.
The area’s popularity with the life science community is so strong that the market’s Class A office and lab space has a vacancy below 3 percent, according to Kilroy.
Kilroy plans to build 11 buildings that will include a laboratory and more office space in phases across the newly-acquired property.
The site adjoins the real estate investment trust’s three-building Oyster Point Tech Center, a 146,000-squre-foot project that is home to DNA testing company 23andMe Inc. The firm acquired the site earlier this year for about $111 million, according to CoStar data.
On a combined basis, the overall project will give Kilroy a significant footprint in South San Francisco’s large and rapidly-growing life science community, home to more than 200 biotech companies.
The property adds to the company’s 13.9 million-square-foot portfolio in Los Angeles, Orange County, San Diego, the San Francisco Bay Area and greater Seattle.