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SAN FRANCISCO-Hines appears to be losing control of another Northern California office property, this one a 43-story, 542,000-square-foot Downtown office building at 333 Bush St. The Houston-based company, which owns the asset with Sterling American Property, confirmed Monday that the JV will exercise its right to deed the class A property back to lenders in lieu of foreclosure.

Hines reportedly began missing payments on the mortgage secured by 333 Bush after its 250,000-square-foot anchor tenant, the Heller Ehrman law firm defaulted on its lease and then filed for bankruptcy late last year. The decision to give the property back comes after Hines and the lender could not agree on a mutually beneficial way to restructure the debt.

333 Bush is the third Northern California office property Hines has had to give back in recent weeks. Last week , Hines confirmed that a joint venture with CalPERS was doing the same thing with three of four buildings (814,000 square feet) within the Watergate Office Complex in Emeryville, CA. It also confirmed the loss of Marin Commons, a 455,000-square-foot office complex in San Rafael.

The lenders for 333 Bush are Brookfield Real Estate Finance and Munich Hypo Bank. Pacific National Bank was the lender on Watergate. Connecticut General Life Insurance (Cigna) was the lender on Marin Commons.

A source with Hines declined to discuss the situation in detail, saying the company does not comment on ongoing discussions with lenders. However, the source did say that several other San Francisco assets–560 Mission St., 101 Second St., 101 California St., 100 Montgomery St.–are in good standing.

Hines and Sterling paid $281 million or $518 per square foot for 333 Bush in mid-2007. The building was 75% leased to Heller Ehrman and America Online, among others. At the time, the 135,000 square feet of vacancy was seen as an opportunity.

“We believe that the timing is right to continue to expand in this market due to its resurgence and the recent leasing activity in the San Francisco area, Hines SVP Paul Paradis said at the time.

Toronto-based Brookfield presumably will assume operational control of 333 Bush. Brookfield owns 108 CBD properties totaling 75 million square feet including World Financial Center in Manhattan, Brookfield Place in Toronto, and Bank of America Plaza in Los Angeles.

Values for Bay Area office properties have fallen by approximately 50% during the recession, and rents and occupancies also have suffered mightily. In many cases, the debt on the property is now greater than the value of the property and/or the revenue stream is no longer enough to cover the interest payments on the debt. As a result, instead of investing additional cash in the building in order to cover the mortgage or restructure the debt some owners are choosing simply to sell at a loss or walk away.

Some 15 San Francisco-area office properties are in distress, according to a recent report by Real Capital Analytics. One of those properties was 250 Montgomery. Earlier this month Realty Finance Corp. of Connecticut sold its original $47-million loan on the 15-story, 126,736-square-foot class A office building here for approximately $25 million or $200 per square foot, according to a source familiar with the transaction. The building was completed in 1989 at a cost of about $41 million. The borrower, Lincoln Property Co., paid approximately $47 million or $405 per square foot for the building in late 2006 and defaulted on the loan in late 2008. Prior to the note sale Lincoln agreed to hand over the property to its new creditor in lieu of foreclosure.

Overall availability in the San Francisco office market increased by 40 basis points in the second quarter to 20.2%, according to a quarterly report from CB Richard Ellis that tracks 76.4 million square feet in the market. The last time the combination of direct vacancies and sublease availabilities crested 20% of the market was 2003, amid the aftermath of the dot-com bust.

CBRE’s report put Q2 net absorption at minus 929,000 square feet, approximately the same as Q1, pushing the mid-year total to minus-1.8 million square feet. The full-year total for 2008 was 2.1 million square feet.

The bulk of the negative net absorption was due to a couple of large leaseholds that had been on the sublease market but expired in the second quarter, according to CBRE, namely the 375,000 square-foot Charles Schwab space at 1 Montgomery, and a 154,816 square-foot Macy’s space at 22 4th St.

Colliers International estimates San Francisco’s weighted average class A effective rent–the negotiated deal – at $34.09 per square foot per year, down 9.8% from the end of March, and the non-weighted average at $33.09. Year-to-date, the weighted and non-weighted averages are down 15.1% and 19.6%, respectively. The results are based on the 105 completed deals Colliers has tracked quarter-to-date.

“The descent in rental rates is mainly due to the market experiencing its lowest leasing activity in over fifteen years,” says Scott Harper, senior vice president of Colliers’ Urban Landlord Partners regional practice group.

Tenants that have been in the market are taking a ‘wait-to-see’ approach, he says–waiting to see if the market will go lower, waiting to see what their own needs will be in the new economy. Based on the few deals that are getting done and negotiations that are underway, Harper says tenants with 2010-2011 lease expirations are “capitalizing on the City’s supply of premium office space at low rental rates to upgrade their facilities.”

With many tenants expected to choose to renew with smaller footprints, keeping available space high in the coming quarters, CBRE predicts that asking rates will likely remain at reduced levels. “Despite the challenging market, prospective tenant demand remains high,” states the report. “What remains to be seen is how many of these tenants will downsize and how many will choose to relocate to new space or renew at their current location. Currently it appears that a majority of tenants will choose to renew at decreased footprints, continuing the trend of increasing vacancy and declining rents.”

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