As with so many cases in real estate, timing is everything. For example, poor timing can cause a beautiful and modern 10-building waterfront office complex to become a distressed asset with battle scars. Indeed, that is exactly what has befallen a 107-acre corporate campus in the San Francisco Bay Area.
Pacific Shores Center, located in Redwood City, California, initially was built for the right industry at the wrong time. Now, however, the 1.7 million-square-foot office park is getting a second (or should we say third) lease on life, thanks in part to an infusion of fresh capital from The Blackstone Group and the return of a former tenant.
Despite being barely more than a decade old and consisting of ultra-modern, eco-friendly buildings, Pacific Shores Center already has had a tumultuous and complicated history. Much of this has to do with the property’s positioning in a region with strong ties to the technology sector. Its problems certainly are not connected to its architecture.
The 10 research & development buildings range from three to five stories, with aerial bridge links for corporate expansion. The environmentally friendly and energy-conscious buildings feature light-filled window bays with insulated solar glass curtain walls and distinctive roof lines to accommodate advancements in solar power technologies. Half the site is open pedestrian space with amenities such as a multi-purpose recreation field, cycling and pedestrian paths, an amphitheatre, a child-care facility, conference, media and fitness centres and a restaurant.
Unfortunately, Pacific Shores Center became a headache for its developer as a result of the previously-mentioned bad timing. Developed by Jay Paul Company to primarily service technology and research & development companies, the property was completed in 2001, just as the dot-com bubble burst. This meant that a number of companies that initially had planned to move in either didn’t or needed less space than originally planned.
One of the first tenants at Pacific Shores Center was the software firm Informatica Corp., which originally leased two buildings. As its revenue growth stalled, however, the company decided to move its headquarters in 2004 to a smaller office one mile away.
In 2006, the technology sector began to pick up again. When it did, Greenwich, Connecticut-based private investment firm Starwood Capital Group stepped up as an interested party and bought the asset for $830 million. In 2007, Starwood resold two of the buildings to Shorenstein Properties for $245 million. This left Starwood with roughly $480 million in debt on the remaining eight buildings.
Of course, bad timing reared its ugly head again. This time, it was the credit crunch and the subsequent global financial crisis, which caused property values across the board to fall sharply.
Another chance at success
Sensing an opportunity last August, Blackstone paid $70 million for an $80 million piece of junior debt backed by the majority of Pacific Shores Center. Then, at the end of last year, Starwood defaulted on the $480 million of debt on the complex. As Blackstone and other creditors began to circle in February, Starwood sold two of the eight remaining buildings for $148.6 million. The unlikely buyer: Informatica.
When Informatica left Pacific Shores Center in 2004, it had a staff of 837. Since then, it has experienced considerable growth and now has more than 2,500 employees. So it’s back to Pacific Shores for Informatica, which plans to return to the complex in 2013.
Thanks to the cash infusion from the Informatica deal, Starwood was able to negotiate a restructuring of the property’s debt and retain ownership of the remaining six buildings in the office park, although it now does so jointly with Blackstone. The restructuring also enabled Starwood to pay down the senior securitised debt on the property from $332 million to about $183 million.
Meanwhile, proceeds from the conversion of Blackstone’s debt into an equity stake brought the property’s total debt down to about $250 million, giving Starwood and its partners additional breathing room. At a little more than half of the estimated $474 million value of the remaining buildings, the remaining debt should now be able to be refinanced by the new joint owners.
As a result, things appear to be stabilising at Pacific Shores Center these days. Although some large leases are expiring this year and next, the office complex currently is more than 90 percent leased. Not only that, with the technology sector picking up steam in the region again, the demand for office parks like Pacific Shores Center is once again on the rise in the San Francisco Bay Area.