Koll Development, which has been trying to gain a stronger foothold in Northern California for three years, is moving closer to making those plans a reality.
After buying 35 acres of prime Silicon Valley land in August, the Newport Beach-based developer is undertaking its largest project in that portion of the state in more than a decade.
Koll has started grading and putting into place infrastructure for a $130 million mixed-use corporate center totaling 585,000 square feet in Dublin. The office, retail and hotel project comes as the company has begun work on Willowbrook Business Center in Union City, which is expected to cost more than $25 million to complete and encompass 415,000 square feet.
Koll also is expecting to wrap up deals within the next two months for a pair of build-to-suit office complexes totaling 800,000 square feet and expected to cost about $240 million to develop. One of those projects would go in the South of Market area of San Francisco and another along the Highway 101 corridor in the Bay Area.
“We’ve done quite a bit in Northern California in the late 1970s and early 1980s,” said Jerry Yahr, Koll’s executive vice president. “But our past activity has been more in the industrial areas. But this year, we’re kicking off with large suburban office projects.”
The company also has been active in past decades with developing build-to-suits in Northern California. But it has been taking its time charting a path following the recession of the early 1990s, gradually moving into more speculative development.
In the past three years, Koll has built a portfolio of more than 2 million square feet in Northern California.
But 2000 could be a breakout year for the firm, which has a development portfolio of more than 70 million square feet throughout the United States, Mexico and Asia.
“The projects we’re doing now, along with the ones we’ve already completed in the past three years, represent a strong belief by Koll in the continued growth of Northern California’s economy,” said Michael Parker, senior vice president and partner for Koll Development. “We plan to continue to aggressively take advantage of opportunities in that market.”
As the development company’s point man in Northern California, he believes prospects for more regional growth look good through 2001. Land values still are going up, especially in parts of San Francisco and the Silicon Valley. “And vacancy rates remain in the single-digit range,” said Parker.
“Originally, I saw red flags on the horizon starting in 2001,” he added. “Right now, with employment growth in the Bay Area still rising at unbelievable rates, I don’t see any major slowdowns through the next two years.”
Koll expects to take advantage of the strong Northern California climate to ask up to $225 a square foot for the company’s first buildings in Dublin. It is also putting the project up for rent, seeking around $2.50 a square foot for a full-service lease.
The first buildings, at four stories and 137,000 square feet apiece, are set to be completed by mid-summer. n
Koll Also Seeking Repositioning Deals
Besides developing 1.8 million square feet of new projects in Northern California costing more than $395 million to complete, Koll Development also is looking to reposition older projects in the area.
The company points to a joint project with one of its former executives as an indication of how it plans to take advantage of hot Bay Area and Silicon Valley markets in the future.
In the deal, Koll bought property in late 1998 across from Intel’s headquarters in the Silicon Valley. It joined forces with a local developer, Gibson-Speno Companies. One of the firm’s partners, Drew Gibson, ran Koll’s Northern California operations for 28 years before leaving in the early 1990s to start his own company.
The deal included two old industrial buildings on the property that totaled about 112,000 square feet.
“It was a great location, and land anywhere in that area for new buildings is just not available,” said Michael Parker, senior vice president and a partner with Koll. “They (Gibson-Speno) identified the property and brought us in to finance a rehab of the site.”
The joint-venture partners decided to undertake the project with an objective of completing renovations and selling the revamped buildings quickly while demand remained strong.
“It was an infill project that we thought could be improved to bring rents and land values up enough to make a quick turnaround,” said Parker.
Also making the project appealing to Koll was the fact that there is a major fiber-optic line running nearby.
In less than 13 months, the partners completed renovations, fully rented the buildings and sold the entire site to Palo Alto-based Dollinger Properties.
“When we bought it, the property had a lot of short-term leases,” said Parker. “We picked out the tenants we wanted to keep and tore up the old leases and signed long-term ones. Between buying out old leases and finding new tenants for unoccupied space already there, we wound up re-leasing about 70% of the space.”
Although Koll representatives won’t say how much they made on the deal, real estate brokers working in the Santa Clara market point out that rental rates there have been increasing rapidly.
According to Tom Smith with CB Richard Ellis in San Jose, the rates for the area where Koll made its deal have gone up more than 20% since 1998.
“I would imagine that they made a good bit more on the sale,” he said.
Smith’s research showed that Koll and Gibson-Speno Companies bought the property from a family trust in 1998 for $7.5 million, or $66.96 a square foot.
“Based on the rates now, they could’ve easily resold that property for $120 to $125 a square foot,” said Smith. “They probably doubled their money on that deal in a relatively short period.”
Parker and other Koll executives are planning more partnerships with local developers. They also want to keep building as well as rehabbing more industrial property, which remains in high demand in Northern California.
“It’s consistent with what we’ve done in the past,” said Parker. “We want to do even more of it in the future.”
