Seattle Commercial Real Estate News of the Day

Friday, April 22, 2011

Seattle Times Daily Journal of Commerce Headline
Microsoft pay raises expected to boost local economy Kilroy Realty pays $100M for Plaza at Yarrow Bay
Ballard hotel site headed for foreclosure Kilroy Realty yesterday paid just over $100 million for Plaza at Yarrow Bay, a four-building office campus on Lake Washington in Kirkland.

Los Angeles-based Kilroy bought the 280,000-square-foot property from HAL Real Estate Investments of Seattle in an off-market deal. The campus is at 10210 N.E. Points Drive and includes a parcel entitled for an 80,000-square-foot office building.

This is Kilroy’s second acquisition here in the last six months, and the company expects to buy more.

Kilroy Chief Investment Officer Eli Khouri said his company wants to have “a significant presence over time” in Seattle. Last fall, the publicly traded real estate investment trust bought Overlake Office Center in Redmond for $46 million.

The Yarrow Bay sale is the latest of several deals. Investment activity is picking up as some institutional investors see the economy stabilizing.

Marcus & Millichap forecasts that investors who plan to hold onto properties long term will target upper-tier assets in the Puget Sound region. Investors are looking in markets, such as Seattle, where rents are expected to increase as the economy rebounds. Seattle is now fourth on Marcus & Millichap’s National Office Properties Index, moving up six places.

“We’re noting a good uptick in activity,” said broker Craig Wilson of CB Richard Ellis, who negotiated both the Yarrow Bay and Overlake deals for Kilroy with colleague Steve Sutherland. “You are going to see rents make a move here in the next 12 to 24 months, assuming things move along as they are now.”

Yarrow Bay is a premier suburban property, according to Wilson. “It’s always had a great reputation and high-quality tenant list. It’s one of those properties that does not come on the market very often.”

It’s 90 percent leased to multiple companies. That makes this transaction different from the recent sales of City Center Plaza and the office portion of The Bravern, which are both leased entirely to Microsoft.

Kilroy’s exposure to tenant rollover is minimal because the renter roster is pretty stable for the next three to four years, Wilson said.

Khouri said the Yarrow Bay cap rate is in the mid 6 percent range.

Among the larger tenants at Yarrow Bay are Bill Gates’ Watermark Estate Management Services, which oversees his personal business; architecture company Otak; and Inrix, a traffic information company.

Kilroy’s timing on Yarrow Bay was ideal. After committing to investing in the Puget Sound region, the company began working with brokers to identify both on- and off-market properties. At the same time, HAL was getting ready to sell.

“They happened to be in the right place at the right time,” said HAL President Dana Behar. HAL decided to sell because “it was time for us to move on.”

HAL owned the property for 17 years. Behar said it’s hard to say how much HAL paid for it because the company bought it in a series of transactions. The company bought into a partnership that controlled the Plaza at Yarrow Bay and acquired partners’ shares over time.

HAL is an investment subsidiary of HAL Holding N.V., an international investment company based in The Netherlands Antilles. It has no plans to reinvest the proceeds into another property.

Khouri said Kilroy has no immediate plans to develop the fifth building. The economics of today’s market wouldn’t support it, he said.

He previously worked for Spieker Properties, which had significant holdings here. Equity Office Properties bought Spieker about 10 years ago. Kilroy hired Khouri earlier this year.

The company also hired Mike L. Sanford of Lowe Enterprises as vice president in charge of Kilroy’s Northern California and Pacific Northwest regions. His responsibilities include asset management, leasing, acquisitions, development and redevelopment.

David Pingree and Shanna Braga, who have previously worked for Kilroy, will manage Yarrow Bay.

Kilroy previously owned a large office campus in SeaTac.

In addition to “very vigorously” looking for investment opportunities here, Khouri said Kilroy is scouting in the Bay Area and Southern California.

Yesterday’s sale of the Plaza at Yarrow Bay comes as office investment activity picks up in the Puget Sound area.

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About CRE Northwest

Specialist in office & investment real estate in Seattle & the Eastside
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