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February 08, 2017

Is Kilroy Realty about to land the biggest lease in San Francisco history?

San Francisco Business Times

Roland Li

Developer Kilroy Realty Corp. said it's in talks with a single tenant to lease its entire 740,000-square-foot Exchange project in Mission Bay in potentially San Francisco's biggest office lease ever.

If completed, the lease may surpass Salesforce.com Inc. (NYSE: CRM)'s blockbuster deal for 714,000 square feet, or half of Salesforce Tower, in 2014. The Exchange at 600 16th St. includes four buildings: a 277,000-square-foot north tower, 265,000-square-foot tower, a 130,000-square-foot mid-rise building, and a 66,000-square-foot mid-rise building. However, some of space is retail.

Such a massive deal would be a strong signal that San Francisco's office market can maintain its historic rate of growth amid a historic wave of 3 million square feet of new projects opening in 2017.

"At the Exchange on 16th, our approximately 700,000 square foot office life science project in the city's Mission Bay neighborhood, negotiations are well underway and now focused on a long-term lease for the entirety of the project coupled with a perspective to making a significant equity investment in the project and thereby taking a minority ownership position," said John Kilroy, CEO of Kilroy Realty (NYSE: KRC), on the company's earnings call on Tuesday. He later said that the equity investment would likely be between 30 and 40 percent of the $450 million project, which opens this year.

Brokerages Kidder Mathews and CBRE are leasing agents for the Exchange. Rios Clementi Hale Studios and Flad Architects designed the building. Hathaway Dinwiddie is the general contractor.

Kilroy has declined to identify prospective tenants at the Exchange, citing confidentiality agreements. As the Business Times previously reported, the University of California, San Francisco has its main campus nearby. It is looking for more space in the area, and three sources said it has shown interest in the Exchange. A UCSF spokeswoman declined to comment.

UCSF is one of San Francisco's largest tenants and owners of real estate, occupying over 7 million square feet, including 1.5 million square feet in Mission Bay, where vacant office and lab space is extremely scarce. The Class A vacancy rate is about 3 percent, Kilroy Realty said on its earnings call.

Typical office tenants rarely buy equity in buildings they occupy, because the costs are prohibitive and real estate isn't their core business. UCSF has a precedent of owning its buildings, including its $1.5 billion Mission Bay hospital that opened in 2015.

Kilroy also said that Adobe Systems Inc. (NASDAQ: ADBE) has increased its 13-year office lease at Kilroy's 100 Hooper St. from 207,000 square feet to 314,000 square feet. Adobe will now occupy all the office space in the $270 million project, which also has about 86,000 square feet of vacant light industrial space. The project broke ground last quarter.

According to data from brokerage Cushman & Wakefield, San Francisco's second-largest deal following Salesforce Tower was JPMorgan Chase & Co. (NYSE: JPM)'s 655,000-square-foot lease at 560 Mission St. in 2000. The city's third-largest deal was Wells Fargo (NYSE: WFC)'s 582,814-square-foot lease of 333 Market St. in 2009.

More recent mega-deals have been from tech tenants: LinkedIn Corp. (now owned by Microsoft Corp. (NASDAQ: MSFT) took the entire 450,209-square-foot 222 Second St. in 2014, and Salesforce leased the entire 444,000-square-foot 350 Mission St., another Kilroy property, in 2012.

Kilroy Realty's other properties include Theranos' headquarters in Palo Alto and the proposed Flower Mart redevelopment.

But when asked by an analyst on the earnings call if the firm considered Oakland an attractive place to invest, John Kilroy was blunt.

"It isn't," he said.

"Do you want to elaborate or..." said the analyst.

"No. I think that's pretty firm," he said.

For the full story, go to San Francisco Business Times.

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