Gold May Help Hines Keep EPA at 75 Hawthorne

The next goal for Hines is to re-sign the US General Services Administration, which leases 259,000-square-foot for the federal Environmental Protection Agency's Region IX Headquarters. The headquarters have been in the building since 1995; the current lease expires in just four months. The GSA is in the process of reviewing offers from Hines and others for a new 300,000-square-foot lease. The request for proposals states that the building represent "environmental best practices" and achieve no less than a Silver rating from the USGBC.

Occupancy under the new lease would be required by February 2011, which means that even if the GSA didn't keep the EPA in 75 Hawthorne it likely would remain in the building for as long as another 20 months or so; while not stabilizing the asset long term it might allow Hines to ride out the economic storm.

In addition to the EPA space the GSA leases 19,000 square feet in the building for the US Department of Agriculture under a lease that expires in 10 months. As well, a portion of a 28,000-square-foot leasehold for the US Passport Agency's operations also is in the building. The lease commenced last summer and runs through mid-2018; the GSA has an early termination option in 2013.

The remainder of the leasehold is in 95 Hawthorne, a five-story 84,000-square-foot building built in 1910 and last renovated in 1990.Also in that building is the US Department of Homeland Security, for which the GSA leases 18,000 square feet under a lease that commenced in November 2003 and expires in 2013; the original expiration date was last fall.

The two buildings comprise Hawthorne Plaza, which Hines and Rreef acquired 18 months ago (Dec. 2007) for $186 million ($416 per square foot). The seller in that deal, a JV of TMG Partners and Farallon Capital, acquired the asset 13 months earlier for $127 million ($287 per square foot) and proceeded to invest several million dollars more for a seismic retrofit and exterior skin renovation.

Hines took the ball and ran with it toward the green goal. Some of the work at 75 Hawthorne included retrofitting lights and lighting fixtures, implementing a comprehensive 'Green Cleaning' program, installing low-flow restroom fixtures, and starting a building-wide recycling and composting program. In addition, the building's mechanical systems allow for 100 percent outside air intake and its floor-plate depths that allow for significant natural light penetration.

Hawthorne Plaza was 82% leased when Hines took over; it is currently 84% leased, according to Hines. A source at TMG told GlobeSt.com at the time that while it did not extend the EPA lease prior to the sale it went along way down the road toward making it happen. The sale price reflected some of that progress, he added.

TMG and Farallon acquired the complex from G REIT, which acquired it for $97 million in early 2004. The total annual rental income from Hawthorne Plaza was $10.76 million ($28.49 per square-foot) at the end of 2005, according to SEC filings by G REIT.

The GSA's current lease rate on its 259,000-square-foot lease expiring at the end of September was not listed on the GSA's lease spreadsheet, which was updated this month. The current annualized rate on its 10-year 20,000 square-foot lease in the building, which expires in March 2010, was listed at $803,174, which equates to $41.69 per square foot.

Excluding sublease space, the weighted average asking lease rate in SOMA in the first quarter was $39.63 for class A space, according to Grubb & Ellis. Vacancy in the 5.4-million-square-foot submarket was 21.4% in the first quarter, which equates to 1.1 million square feet. SOMA's total vacancy rate has not changed dramatically in the current market downturn; during the tech bust in 2001 and 2002 office vacancy in SOMA topped 50%.