$197M Buys 600,000-SF Waterfront Office Property

SAN FRANCISCO-The Hills Plaza waterfront office complex here changed hands in a deal valued at $197 million. The 600,000-sf office development is 98.5% leased with minimal turnover through 2010. The new owner is Morgan Stanley Real Estate’s Prime Property Fund. The seller was Shorenstein Realty Investors LP, a fund managed by Shorenstein Co., a locally based real estate investment management company. Shorenstein Realty Investors LP acquired the asset in 1994 for $120 million.Hills Plaza is a two-building office development on 3.5 acres of waterfront land along the Embarcadero, the promenade that runs along the San Francisco Bay, offering views of the Bay Bridge and Treasure Island. The Gap keeps its headquarters at the complex, and Sharper Image will relocate its headquarters there in February 2006, in 75,000 sf formerly occupied by Internet company Critical Path. Other tenants include Gensler Architecture, Babcock & Brown and Bridge Housing.The office buildings are 345 Spear St., built in 1989, and 2 Harrison St., built in 1925 as the original Hills Brothers Coffee factory. The 2 Harrison St. building is a National Landmark that was completely renovated in 1989. A landscaped public plaza joins the two buildings. Prime Property Fund is an open-ended fund launched in 1973 that is actively being marketed and, therefore, Morgan Stanley is not saying anything else about it. Shorenstein Realty Investors LP is Shorenstein’s first fund, formed in 1992. The fund had $160 million in committed equity and invested the money in six assets over a two-year period and is now being liquidated. The only other asset still in the fund is Phoenix Plaza in Phoenix. A source at Shorenstein says the property went on the market following a significant leasing effort that culminated in the Sharper Image transaction.While Shorenstein has been a net seller as of late, it is no doubt looking to buy, and the city is on the radar screen despite these pending dispositions, according to one company source. Earlier this year the company closed its seventh fund with $775 million in equity supplied by foundations, college endowments, pension funds and high net worth families. With Shorenstein typically using acquisition debt in the range of 60% to 65% of cost, Shorenstein Realty Investors Seven LP will have capacity to acquire approximately $2.2 billion in office assets. The new fund was first opened to subscription in July 2003 and held its final closing in February. No funds have yet been invested. The fund will pursue the same strategy as Shorenstein’s previous funds, seeking to acquire large, complex and management-intensive office properties in major US markets wherein Shorenstein believes it can add value via its in-house investment, asset management, leasing and operating staff. Since 1992, Shorenstein has initiated six previous funds that attracted $1.5 billion in total equity. Four of which are fully invested and none have been fully liquidated. The funds have acquired and developed about 16 million sf of class A office properties throughout the US. The equity invested in Shorenstein Realty Investors Seven, the company’s largest fund to date, is equal to about 50% of all equity invested in the previous six funds.In May, Shorenstein said it was in the process of unloading two assets that pre-date its first fund. Walton Street Capital of Chicago has since closed on two-thirds of 425 Market St.–MetLife is holding onto its piece–for $148 million. In the other deal, which is still in escrow, Wells Fargo is acquiring all of 333 Market St. for an as yet undisclosed price. The two properties are being sold because Fremont Properties, which co-developed the buildings with Shorenstein, had structured sales for their interests in the properties and the other partners, including Shorenstein, decided not to exercise their buy-out options. For Shorenstein, the properties represent an ownership structure that it abandoned some 14 years ago in favor of funds and now is looking to unwind as opportunities arise.