Shorenstein Raises $600-Million Fund
Shorenstein Co., owner of San Francisco’s Bank of America Center and Chicago’s Prudential Plaza, raised a $600-million fund to add to its office holdings on the expectation that rents and occupancy rates will rebound.
The fund, the San Francisco-based company’s sixth, will allow Shorenstein to buy $1.7 billion worth of downtown and suburban office buildings after U.S. office rents had their biggest drop in nine years in the second quarter, and the office vacancy rate rose to 10.8%, the highest point in four years.
“We have a track record of operating through down cycles and that’s when you want to be a buyer,” said Douglas Shorenstein, chairman and chief executive. “We’ve always invested counter- cyclical to the capital markets.”
Shorenstein, which has 25 million square feet of property valued at $5 billion, joins other investors who are raising money to buy real estate. Office buildings are being priced to generate a return of 9% to 10%, up about 100 basis points from a year ago, said Ken Rosen, chairman of the Fisher Center for Real Estate at UC Berkeley.
A fund managed by Leon Black’s Apollo Advisors agreed last week to buy 75 suburban office buildings and a retail center from Koger Equity Inc. for $300 million. Others pursuing the strategy include New York-based Tishman Speyer Properties and Houston-based Hines Interests.
“It’s a great time to have money,” Rosen said. The cost of debt is low, which enhances the appeal to buyers, he said.
The biggest investors probably will include real estate investment trusts such as Equity Office Properties Trust, Vornado Realty Trust and Boston Properties Inc., Rosen said.
Shorenstein said his company has $75 million of its money in the fund, which will focus primarily on such markets as New York, Washington, Boston, San Francisco, parts of Los Angeles and Chicago.
“Capital is relatively thin and we’ve been priced out of those markets in the last few years,” Shorenstein said. “Now there’s an opportunity to move into those markets at pricing that makes sense.”
The fund may invest in suburban markets. He doesn’t expect to invest in new development. Purchases will generally exceed $100 million.
Shorenstein said sellers are more “realistic” in their expectations than they were a few months ago.
“I do believe there will be a realization by many sellers if there’s a recovery, prices will stabilize but not generally go up,” said Kevin Dretzka, managing director at Eastdil Realty, a New York-based real estate investment banking firm. “As that realization becomes more firmly planted, they’ll say, ‘We better do some pruning, circulate capital and book some gains.’ ”
Foundations, college endowments and high-net-worth families contributed to the fund. Shorenstein said the money was easier to raise than two years ago, when the company last put together a fund, raising $281 million amid falling office vacancy rates.
With $700 million in commitments, Shorenstein had to turn away investors, in part because it wanted to raise only as much as it could invest in a two-year cycle. Also, the Nasdaq composite index’s 54% slide in the last year has made real estate look more attractive.
“When we raised the fifth fund, when I’d talk about real estate returns in the high teens, many investors were half asleep--and when they woke up would tell you about the 200% they make in Webvan,” Shorenstein said. “That’s out of the market now. Investors are interested in cash flow and the value hard assets provide.”
