DivcoWest Flips 354 KSF San Francisco Office Building

DivcoWest has entered into an agreement to sell 1275 Market St., a 354,000-square-foot office building in San Francisco, to Dolby Laboratories Inc. in a transaction valued at $109.8 million. Dolby will occupy the office tower in its entirety.

DivcoWest has entered into an agreement to sell 1275 Market St., a 354,000-square-foot office building in San Francisco, to Dolby Laboratories Inc. in a transaction valued at $109.8 million. Dolby will occupy the office tower in its entirety.

DivcoWest will certainly turn a profit on the deal. It was just months ago, October 2011 to be exact, when DivcoWest and TMG Partners acquired 1275 Market from the State Compensation Insurance Fund for a mere $44 million–although it is unclear whether there was any additional cost in the form of the assumption of debt.

Dolby will be right at home at 1275 Market. The 35-year-old building sits on an approximately 1.3-acre parcel in the city’s mid-Market neighborhood, which is fast becoming a hub for technology and creative companies. Twitter recently claimed roughly 205,000 square feet in the 775,000-square-foot Market Square North building at 1355 Market St. for its new headquarters. And online home furnishings purveyor One Kings Lane and CallSocket have since committed to a respective 50,000 and 30,000 square feet in the building.

Buying its own building was one of a limited amount of choices for Dolby in its home city of 36 years, as San Francisco’s market for contiguous large blocks of leasable Class A office space is becoming, as commercial real estate services firm Jones Lang LaSalle Inc. describes in a report, “increasingly constrained.” The few remaining options are being snapped up in short order. In the first quarter, Salesforce.com signed a new lease for 400,000 square feet in the South Financial District and Macys.com took nearly 250,000 square feet in the South Financial District.

As indicated by recent transactions, the thriving and rapidly expanding tech industry is the leading driver of demand in the San Francisco office market, and the loud call for accommodations has resulted in the highest rent growth in decades, as per the JLL report. Rental rebates for Class A properties jumped 20 percent in 2011 and rose 7.6 percent in the first quarter of 2012.

And as market fundamentals continue to strengthen, more investors are beginning to hover, eagerly awaiting a chance to snap up assets. Of course, the price tags are relatively high. During the first quarter, Zynga purchased the 668,300-square-foot 650 Townsend for $234 million, or $350 per square foot. And the hefty numbers do not decrease with size. Strada Investment Group acquired the 54,000-square-foot Two Bryant St. in the high-demand SoMa submarket for $432 per square foot. It seems it’s a good time to sell.