Brookfield Properties has foreclosed on 333 Bush St. and the cash-rich Toronto-based real estate investment trust is positioning itself to scoop up more distressed office towers over the next year.

Brookfield took ownership of the 543,000-square-foot office building Dec. 3 after a trustee sale on San Francisco City Hall’s back steps failed to produce any bidders. A Brookfield subsidiary held a junior piece of a $224 million loan on the property; Hypo Bankheld the senior piece of the debt. Brookfield Senior Vice President Bert Dezzutti, who oversees California for the company, said Brookfield has opened an office in San Francisco and is ramping up property management operations.

“It’s not how we envisioned we would enter the market, but we are comfortable with it,” said Dezzutti. “It will be for us a launching pad for a greater presence. Now with 333 Bush St. we will have a beachhead that will allow us to explore other opportunities. Our intention is to grow here, not to have a one-off building.”

Brookfield owns 108 properties totaling 75 million square feet in the downtown cores of New York, Boston, Washington, D.C., Los Angeles, Houston, Toronto, Calgary and Ottawa. The company owns the World Financial Center in Manhattan, Brookfield Place in Toronto and Bank of America Plaza in Los Angeles. San Francisco fits perfectly into the Brookfield portfolio, Dezzutti said.

“It’s a market with a high barrier to entry, a controlled supply and the prototypical great workforce,” said Dezzutti. “It perfectly fits our focus on mature central business districts.”

The Bush Street building was previously owned by a joint venture between Hines and Sterling American Property, which paid $281 million for the building, or $500 a square foot in 2007. Hines and Sterling stopped paying the mortgage on the property in August. At the time, Hines executives sent a letter to commercial real estate brokers explaining that its decision to give the property back to lenders was driven by the failure last year of anchor law firm tenant Heller Ehrman.

“We were as shocked as you were when Heller Ehrman, a 118-year-old law firm and the major tenant leasing 250,000 square feet defaulted on its lease and eventually entered into bankruptcy,” stated the Hines executives. “We diligently worked with the lender but were not able to come to a mutually satisfactory restructure of the existing debt.”

The Heller Ehrman bankruptcy left the building 70 percent vacant at a time when the central business district has an availability rate — both sublease and direct space ­— of about 20 percent. Meanwhile, tenants are in the driver’s seat as direct average Class A rents have dropped from $50 a square foot to $35 a square foot.

Still, with a new owner willing to spend money on tenant improvements, 333 Bush St., which on its upper floors offers panoramic views and 12 private offices per floor, may be able to make a play for some hot tenants. Major tenants that 333 Bush St. will be competing for include consultant Deloitte & Touche and law firm Latham & Watkins. Angus Scott of the CAC Group, which is marketing the building for lease, said the resolution of the ownership situation will help make a compelling case to tenants. Current tenants in the building include AOL and the law firm Shook Hardy & Bacon LLP.

“There is no more mystery to it — it’s a big institutional owner with deep pockets who knows how to operate buildings in a tough environment,” Scott said.

Jones Lang LaSalle Research Director Colin Yasukochi said the Heller space could lease quickly, although the economics of all the deals that will be executed in the next year will favor tenants.

“This brings a much stronger ownership structure to that building in a pretty active market from a tenant perspective,” said Yasukochi. “On the other hand, we are at the lows of the market and you don’t want all your leases written at the lows of the market. Several years back vacancies meant opportunity; today vacancy is more of a liability than an asset.”

Brookfield has long sought property in San Francisco’s central business district. The REIT was outbid on several assets that traded during the market spike between 2005 and 2007, including the BofA building at 555 California St. and the former Equity Office Properties portfolio that Blackstone sold to Morgan Stanley in February 2007. Now with values down by some 50 percent, owners like Brookfield are positioning themselves to snatch up assets and debt. In the third quarter of this year, Brookfield announced the formation of a $5 billion turnaround fund “dedicated to investing in under-performing real estate.”

“Do they come in the form of actual real estate or do they come in the form of paper? It’s anybody’s guess,” said Dezzutti. “As a firm we are prepared to do either of these. We are extremely well-positioned to take advantage of opportunistic situations that are going to occur over the next year.”

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Tom Poser, Jones Lang LaSalle, San Francisco
www.sanfranciscotenantrep.com

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