Google’s $65 million purchase of 188 The Embarcadero in San Francisco is another sign that sales for office buildings in the city are headed for its strongest year since its 2007 market peak. According to Real Capital Analytics (RCA), a global data and analytics firm focused exclusively on commercial real estate transactions, Google’s latest acquisition brought San Francisco’s office sales through last week up to $3.67 billion, four times higher than the same period last year and headed for the highest annual tally since $8.97 billion in 2007.
“There’s seemingly insatiable demand in San Francisco,” says Ben Carlos Thypin, Director of Research Analysis at Real Capital Analytics. “Institutional investors are buying the highest-quality properties they can get their hands on.”
At about $738 per square foot, Google’s recent purchase is just shy of Blackstone’s recent acquisition of One Market Plaza at $823 per square foot, the highest since it sold the same property to Morgan Stanley for a record $1,001 per square foot in 2007, shows RCA data.
The Embarcadero building and One Market Plaza were part of large acquisition sold to Morgan Stanley by Blackstone in June 2007, a deal that was financed with commercial mortgage-backed securities. The default of a mezzanine loan led AREA Property Partners (now part of Ares) to take over the Embarcadero office, with USAA becoming co-owner, RCA data shows.
How much they paid is “not really clear” since it wasn’t a standard transaction, Thypin states.
Average cap rates for San Francisco office sales is at a record-low 5.1% as of June 30, compared with 6% for an index that tracks deals in six major U.S. cities, shows RCA data.
However, RCA Managing Director Dan Fasulo warns that fierce investor interest, and a reliance on technology companies whose growth projections proved false in the late 1990s Internet boom, may yet lead to a slowdown in demand and rents.