Harbor Group, Paramount Acquire San Francisco Office Asset

The joint venture paid $227 million, or $775 per square foot, for the 293,000-square-foot office building at 111 Sutter St. The CBD property is LEED Gold-certified.
111 Sutter Street

For JLL Income Property Trust, the time to sell 111 Sutter Street in San Francisco for $227 million was right—the 293,000-square-foot office building sold at more than two times the initial acquisition cost and it had appreciated to nearly 10 percent of the REIT’s portfolio. For the two new owners—Harbor International Group and Paramount Group—the time was right too. 

The purchase price for the historic 22-story building in the North Financial District was approximately $775 per square foot and among the highest so far this year in the city, where there have been five nine-figure building sales, the San Francisco Chronicle reported. The joint venture received a $175.5 million, four-year loan to finance the property, according to Yardi Matrix. The mortgage is interest-only at LIBOR plus 215 basis points and has three one-year extension options.

“Expanding to the San Francisco CBD office market is a strategic decision for Harbor Group International to diversify our West Coast investments,” Richard Litton, HGI president, said in a prepared statement. 

Paramount, which has a 2.9 million-square-foot office portfolio in San Francisco that is 98 percent leased, will be the property manager and oversee day-to-day operations at 111 Sutter Street. It brought in HGI as a joint venture partner with a 51 percent equity interest. HGI owns two office assets in Cupertino, Calif., in Silicon Valley. The two real estate investment firms have entered into joint ventures in the past on debt investments.

“We plan to leverage our position as one of San Francisco’s largest landlord to meaningfully increase the building’s net operating income,” Albert Behler, Paramount chairman, president & CEO, said in a prepared statement. “In addition to the existing vacancy, approximately 50 percent of the currently occupied office space is scheduled to expire through 2021, providing us a tremendous opportunity to create value for our shareholders as we proactively manage and lease the asset.”

Located one block off the Market Street corridor, the LEED Gold-certified building constructed in 1926 currently has a mix of technology, media, business services and not-for-profit tenants. It offers 12-foot slab-to-slab exposed concrete ceilings allowing abundant natural light into tenant spaces, which appeals to tenants seeking creative space.

Behler told analysts Thursday during an earnings call that the acquisition gave the REIT the “opportunity to once again recycle a portion of the capital received from selling stabilized assets in Washington and redeploy them into San Francisco CBD at a very attractive basis.” Referring to the REIT’s ownership of 50 Beale, a 662,000-square-office building it has owned in San Francisco since 2014, Behler called attention to the firm’s experience in value-add properties.

“When others are paying well over $1,000 per square foot for stabilized product with no prospect for value creation, we feel good about acquiring these assets at an attractive basis where we can bring to bear our strength to add value,” he told the analysts.

Portfolio ‘cornerstone’

Allan Swaringen, president & CEO of JLL Income Property Trust, said 111 Sutter Street had “been a cornerstone of our portfolio since we launched JLL Income Property Trust in 2012.” While it has been one of the REIT’s best-performing assets, Swaringen said the firm was following its core investment strategy by selling the office building now, while San Francisco office rents and per-square-foot prices are at an all-time high.

“We’ve sold over $730 million and more than 30 properties, harvesting gains and reinvesting in properties and markets that we believe represent better risk-adjusted opportunities for our investors,” Swaringen said in a prepared statement. “Recognizing we are later in the cycle, we believe it is essential to be a timely seller as well as a disciplined acquirer. In keeping with our derisking portfolio strategy, we have been underweighting our allocation to office properties and focusing on property types that historically have required less ongoing capital investment and have generated more free cash flow from operations.”

The sale proceeds will be reinvested across a number of properties and geographic markets to further diversity the REIT’s portfolio.

Image courtesy of JLL Income Property Trust