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Tishman Plans San Francisco Offices as Tech Demand Surges

Tishman Speyer Properties LP plans to build a San Francisco office building without having a signed tenant, the city’s first speculative project since 2006, as demand for space surges amid growth at technology companies.

Tishman bought a parcel known as Foundry Square III in the South of Market district and will “move ahead immediately” with development, Jerry Speyer and Rob Speyer, co-chief executive officers of the New York-based firm, said in a statement. Tishman paid $37 million in cash for the land and $4 million for architectural drawings, and won’t need a loan to finance construction, said a person familiar with the plans who asked not to be named because the terms of the deal are private.

“Office-space demand and rent growth have been extremely strong in San Francisco,” the Speyers said in the statement to Bloomberg News. “In a very supply-constrained market, this creates an extraordinary opportunity for a developer with a prime site and the ability to build without delay.”

The cost of developing the most desirable and best-located offices, known as Class A space, is about $650 a square foot in the city, said Michael Covarrubias, chief executive officer of San Francisco-based developer TMG Partners. That would put Foundry Square III construction at about $186 million, and the total cost at $227 million, including the site and drawings.

Foundry Square III will have 286,000 square feet (26,600 square meters) of space, according to the person familiar with Tishman’s plans. Tishman’s joint-venture partner for the project is J.P. Morgan Asset Management’s Global Real Assets unit, on behalf of institutional investors, the person said.

Rockefeller Center

Rick Matthews, a spokesman for closely held Tishman, declined to comment on Foundry Square III beyond the statement from the Speyers. Jerry and Rob Speyer are father and son. Their company’s holdings include such New York landmarks as Rockefeller Center and the Chrysler Building. The San Francisco Business Times reported the firm’s building plans yesterday.

“Given the current difficulty in securing financing for new construction, starting a downtown spec office building is indeed a rarity,” Peter C. Roberts, Americas CEO for brokerage Jones Lang LaSalle Inc., said in an e-mail. “There is not much spec office development at all.”

More than 1 million square feet of leases were signed by technology companies in San Francisco in the first two months of 2012. Among the firms signing contracts for space were Inc., LinkedIn Corp., Riverbed Technology Inc. and Macy’s Inc.’s online store, according to Mayor Edwin Lee’s office.

Biggest Rent Growth

San Francisco’s metropolitan area led the U.S. in effective office-rent growth with a 6.8 percent advance in the first quarter from a year earlier, according to research firm Reis Inc. New York was second at 4.8 percent and the U.S. average was 2.1 percent, the New York-based research firm reported April 5. Effective rents are what tenants actually pay landlords after concessions.

“The growth chart looks like a straight up exclamation point, not a hockey stick as before,” said Covarrubias, whose closely held company renovated a South of Market building for Zynga Inc., then agreed last month to sell it to the online-game maker for $228 million.

Tishman bought the Foundry Square site from San Francisco-based developer Wilson Meany Sullivan, according to the person familiar with the deal. The acquisition was completed April 4, the person said.

Glenn Bunting, a spokesman for Wilson Meany Sullivan, declined to comment.

Late 1990s Development

Foundry Square was conceived in the first Internet wave of the late 1990s as four buildings, each 10 stories high, at First and Howard streets. Foundry Square III is the last to be built. Foundry Square I, occupied by money manager BlackRock Inc., is set to be sold for $240 million to State Teachers Retirement System of Ohio, a person familiar with the transaction said last month. Foundry Square II is leased to law firm Orrick, Herrington & Sutcliffe LLP, and Foundry Square IV, leased to Oracle Corp., is on the market.

Landlords hold sway in San Francisco after last year’s record 2.9 million square feet of occupancy growth, according to the San Francisco office of Cassidy Turley. The amount of leased space in the city is now greater than it was in 2007, before the U.S. real estate downturn and recession, Frank Fudem, a partner at the commercial brokerage, wrote in a February letter to clients.

“San Francisco faces the risk of a sharp rent spike, on top of rates that are already considerably higher than just a year ago,” Fudem said in the letter.

Tishman also built San Francisco’s last speculative office project, a 34-story Class A tower with 555,000 square feet, at 555 Mission St. The developer has approval to construct a 27-story building with 450,000 square feet at 222 Second St., also in partnership with the J.P. Morgan Asset Management unit. The tower may be ready for construction in the first quarter of 2013, said the person familiar with Tishman’s plans.

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