Considering that Salesforce.com signed an 18-year lease for over half the 817,000-square-foot building they currently occupy at 50 Fremont in 2012, a lease which includes the right to buy the building in 2017, it really shouldn’t come as too much of a surprise that the company is reportedly in contract to buy the 43-story building.
The real surprise is that TIAA-CREF, which favors stable, long-term investments, is selling the building earlier than necessary, unless their analysts aren’t expecting the 50 Fremont Street tower to be worth more in a year or two.
Salesforce, the largest technology employer and leaseholder in San Francisco, lost $400 million on nearly $5 billion of revenue over the past twelve months but has been growing their top line at over 30 percent per year.
UPDATE: The Business Times has confirmed a contract price of $640 million for the 50 Fremont Street tower, or roughly $780 per square foot. While inked this week, the sale is slated to close in the first quarter of Salesforce’s fiscal year 2016 which begins February 1, 2015.
Interesting. Maybe TIAA-CREF does not expect significant appreciation in the SF office market over the next years? Hence the early sale? Indication of a possible decrease of demand for pricey SF office space in favor of other Bay Area office locations and other non-Bay Area up and coming centers. Like Seattle.
or an indication that massive amounts of new office space coming online in the near future will limit the upside potential…
Not really. It is not massive when compared to what is going on inSilicon Valley or Seatle or Boston or Texas cities.
Its a one-time bump. Prop M kicks in restricting annual construction to 850K. Really 800 as 50K is set aside for smaller projects.
Google is gobbling up several hundred K pieces of office space. The 800 K limit will severely restrict future office growth in SF (who knows it may be tightened given the uproar over the tech stuff in SF neighborhoods) so if anything you’d think office buildings would be pricier. Right? Well all things being equal not so if TIAA-CREF expects a significant drop in demand for SF office space.
Just trying to be logical. Less space, more demand equals bigger price in the future. Less space, less demand equals flattening prices in the future. TIAA-CREF seems to be banking on the latter. Getting out while the getting is good.
SF has been adding millions of square feet of office space, and I’m pretty sure it can compare to places like Silicon valley, Boston, and Texas cities (got any stats?). While prop M does limit office construction to 850k square feet per year, it also allows for unbuilt office space to add up on subsequent years. The Salesforce tower alone has 1.4 million square feet of office space, and of course there are many other office buildings that are also under construction, recently finished construction, or will start soon.
You do realize Prop. M restricts natural office growth, thus limiting supply, increasing demand, and ensuring that only the wealthiest businesses (namely, tech corporations) can stay in and operate in SF?
what is the price per foot? maybe Salesforce made an offer TIAA couldn’t pass up. Users tend to overpay compared to what an investor would for the same property.
UPDATE: The Business Times has confirmed a contract price of $640 million for the 50 Fremont Street tower, or roughly $780 per square foot. While inked this week, the sale is slated to close in the first quarter of Salesforce’s fiscal year 2016 which begins February 1, 2015.
TIAA is a risk averse investor and having 50% + of your building leased to a single Tenant, can be highly risky. TIAA is essentially reliant on the health of SalesForce (for better or worse) for the future performance of 50 Fremont.
$780 psf sounds really high? Isn’t that premium pricing, hence owner decided to sell early?
Nothing more than further evidence of a market top. A technology company (kind of, sales software) that has remarkably lost money over consecutive quarters (Wall St is starting to notice that top line revenue growth isn’t good enough, bottom line profits are needed) goes on a real estate spending spree that not only includes two top of market leases (in the Kirby building and the Tower), now is buying a a premiere Class A building at $750 a foot. Bad real estate play in my opinion.
they are focusing on growth, not income. they could cut costs and turn a profit, but it doesnt make sense to do that when you can continue to grow exponentially and let revenue eventually outgrow expansion costs. You make “losing money” sound like a bad thing, but in this scenario it is not.
if they focued on income over growth, wall st would slaughter them
^Is it? They’re going to finance the heck out of that deal using whatever cheap revolver/capital markets options they have. They’re going to collect income on the other leases to cover debt service, and then some (there’s no capital to put into the building – everything goes to the bottom line). And so essentially, aside from this one-time acquisition event (which is chump change compared to buying another company), they’re reducing their overhead going forward. A real estate lease in SF (and London, and other cities they maintain offices in) is expensive. Should help the bottom line, not hurt.
The only other buyer for this would have been some super core or foreign pension group with an extremely low cost of capital, looking for essentially no risk, limited tenant roll, high credit tenants, A+ location, trophy style building. The only entity with an even lower cost of capital is a large owner-operator with good credit, such as Salesforce. If they must be in SF, I’d say this is an amazing move.
Contrast the decision with that of Wells Fargo who has the lowest cost of capital there is, employs multiples over Salesforce in San Francisco, and oh makes about 4 billion dollars more per quarter. While they own their headquarters, they remain the largest tenant in SF and would never buy at a market peak.