San Francisco Business Times
By J.K. Dineen
November 6th, 2009

The Shorensteins are jumping back into the downtown market with the $25 million purchase of 188 Spear St., the first property the legendary family real estate investment firm has bought in San Francisco since 2005.

Prudential Real Estate Investors is in contract to sell the 147,000-square-foot office property to Shorenstein for $170 a square foot, a 56 percent drop from the $385 a square foot or $56.9 million that the city assessed the south financial district property for last fiscal year. The only other Class A financial district building to sell this year, 250 Montgomery St., traded for $172 a square foot — also a 56 percent drop from its previous sale in 2006.

With so few sale transactions in the last two years, some in the real estate industry have argued that it’s difficult to gauge how much property values had fallen from their peaks. Two recent deals, each at a 56 percent discount, provide a clearer indication.

The 188 Spear St. deal is scheduled to close on Nov. 15. The mostly empty building on the corner of Howard and Spear streets was part of a 10-building national portfolio that Broadway Partners acquired from Beacon Capital in 2007 at the apex of the frothy market. After the market collapsed last year, Broadway ceded control of the building to Prudential, the mezzanine note holder. While Shorenstein is technically buying the note on 188 Spear St., it will acquire the property itself at closing. The buyer is the Shorenstein family rather than any of the investment funds that Shorenstein Properties operates, according to sources. A spokesman for Shorenstein declined to comment.

The last property Shorenstein bought in San Francisco was in 2005 when the company teamed up with SKS Investments to buy a Mission Bay development site at 409-499 Illinois St. SKS and Shorenstein also bought a development site on Oyster Point in South San Francisco in 2008 that is being entitled for a 2.3 million-square-foot biotech campus.

“Walter Shorenstein is a legend in American real estate history, and if he is buying again, I think that is a pretty strong signal,” said Mark Geisreiter, regional managing director of Grubb & Ellis. “At this point it’s a gut feeling. He is buying something close to home, of good value, in a market he understands.”

Some 23 investors made offers on 188 Spear St., with offers splitting into two categories. On the lower end, at $130-$150 per square foot, were opportunistic buyers looking for a return based on current leasing rates and tenants. On the higher end were long-term cash investors willing to hold onto the property through what promises to be a long and painful recovery.

“If you have a long enough horizon and can buy a building at $170 a foot that is well-located, then you reasonably say sometime in the next 10 years I am going to be able to sell this at a great price per square foot,” said Diane Olmstead, a managing partner with real estate advisory firm W3 Partners. “The Shorensteins are smart. They don’t do things carelessly, and they have a long-term horizon.”

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