Crown Jewel 111 Sutter Goes at Near Record Price
At a sale price of $227 million, this asset appreciated to nearly 10% of the portfolio, closing at more than two times the acquisition cost at near record pricing for the San Francisco market.
SAN FRANCISCO—A recent disposition comes at a time when San Francisco office rents and per-square-foot prices are at an all-time high. Multi-tenant 293,000-square-foot 111 Sutter St. was previously the largest single-property investment in JLL Income Property Trust’s 70-property $2.7 billion portfolio.
It was recently purchased by the joint venture of Harbor Group International LLC and Paramount Group Inc. At a sale price of $227 million or approximately $775 per square foot, this asset had appreciated to nearly 10% of the portfolio. With near record pricing for the San Francisco market, 111 Sutter closed at more than two times the initial acquisition cost.
“The iconic 111 Sutter building has been a cornerstone of our portfolio since we launched JLL Income Property Trust in 2012,” said Allan Swaringen, president and CEO of JLL Income Property Trust. “It has been one of our best-performing investments over the last seven years. That said, in keeping with our core investment strategy, 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. Recognizing we are later in the cycle, we believe it is essential to be a timely seller as well as a disciplined acquirer.”
As this de-risking portfolio strategy coincides with the maturing real estate cycle, JLL Income Property Trust has been underweighting its allocation of office properties and focusing on property types that historically have required less ongoing capital investment and generated more cash flow from operations. This results in JLL Income Property Trust targeting property sectors and markets that better align its core income-oriented, lower volatility and lower leverage investment strategy.
“We are seeking more reliable income and cash flow, and less capital investments,” Swaringen tells GlobeSt.com. “In analyzing 111 Sutter, we realized it would require $20 million in capital to stabilize the asset in order to retain and attract tenants.”
The LEED-certified property is approximately 70% leased. Paramount currently holds an office portfolio of 2.9 million square feet in San Francisco that is 98% leased. Paramount will act as property manager for the building and oversee day-to-day operations.
Swaringen goes on to say that JLL Income Property Trust has been buying a lot of warehouses, which generate more cash flow. In fact, that property type accounts for about 30% of its portfolio. Another 30% is allocated to grocery-anchored suburban retail centers, which are nearly all leased in a variety of US markets. These are also strong cash flow generators, provide long lease opportunities and require minimal tenant build-outs, he says.
Another 25% of the trust’s portfolio is in garden-style multifamily near the top 10% of schools in the country. In fact, the proceeds from the 111 Sutter sale will be reinvested into this property type in markets such as Dallas-Fort Worth, further diversifying JLL Income Property Trust’s portfolio.
“This strategy has a lot of legs,” Swaringen tells GlobeSt.com. “There are supply constraints in those markets.”
The final percentage of the portfolio will be devoted to medical office properties. JLL Income Property Trust currently owns three medical properties with plans to add more as the cycle evolves.
The trust purposely is underinvested in San Francisco, New York City, Los Angeles, Washington, DC and Boston. Swaringen says those gateway markets are more competitive and JLL Income Property Trust tends to view its investments from a strategic profile and demographic standpoint.
As further evidence of that thinking, further diminishing vacancy and tenant demand are forming an extremely competitive market in San Francisco, according to Newmark Knight Frank’s fourth quarter 2018 office report. Current availabilities total 6.6 million square feet, yet demand is also 6.6 million square feet. The result has been an increase in rent of 12.8% year-over-year to $82.47 overall. Large-block pricing has gone up further, and tenants leasing more than 50,000 square feet are paying a premium, averaging nearly 10%, and tenants leasing more than 200,000 square feet are paying a premium of more than 20%, the report indicates.