Big downtown San Jose office complex is bought amid hot investment interest

SAN JOSE — Two older office towers in downtown San Jose have been scooped up by a veteran investment group in a fresh sign of robust interest in properties in the urban core of the Bay Area’s largest city.

111 Market Square, once known as Community Towers, has been bought by an affiliate of San Francisco-based Rubicon Point Partners, Santa Clara County public documents filed on May 2 show.

The deal is the latest indication that investors and developers continue to scout for opportunities in downtown San Jose. Efforts by tech titans Google and Adobe to create huge new office projects to accommodate a growing number of employees are helping drive the demand for downtown sites.

“San Jose and the downtown are now seen as an opportunity market,” said Nick Goddard, a senior vice president with Colliers International, a commercial real estate firm. “Office rents are good. Institutional capital wants investments with a big upside.”

The Rubicon Point affiliates paid about $141.4 million for the two towers, the county property records show. Rubicon Point also obtained $93.5 million in financing from Bank of America to help undertake the purchase, the public documents show.

One building is at 111 W. Saint John St. and the other is at 111 N. Market St. Together, the two office towers total roughly 324,000 square feet. Newmark Knight Frank, a commercial real estate firm, helped to arrange the purchase.

Originally developed in 1965, the two office buildings and their common areas have undergone multiple and extensive upgrades in recent years to create an ultra-modern feel for both towers.

This week’s deal — one of the largest property purchases in Santa Clara County so far in 2019 — shows that commercial real estate values in downtown San Jose have dramatically increased since Google began buying sites to develop a transit-oriented community of office buildings, homes, shops, restaurants and open spaces near the Diridon train station.

“Downtown San Jose is looking like a casino we want to play in,” said Mark Ritchie, president of Ritchie Commercial, a real estate firm.

While the latest purchase values the two towers in Market Square at around $148 million, the sellers in the most recent deal, Ridge Capital Partners and TPG Equity REIT, paid $64.8 million to buy the two office towers in 2016. In 2014, Swift Real Estate Partners bought the two office towers for $40 million.

“These are dramatic appreciation numbers that no one expected,” Ritchie said.

This week’s purchase arrived at a time of steady improvement in the downtown San Jose office market. At the end of December, the downtown office vacancy rate was 14.2 percent. By the end of March, downtown office vacancies were at 12.5 percent, according to a report by Cushman & Wakefield, a commercial real estate firm.

“Office vacancies are extremely tight in downtown San Jose,” Goddard said.

Ridge Capital and TPG Equity undertook $30 million in renovations of the Market Square towers during 2017 and 2018, according to the Ridge website.

“Exterior upgrades, new lobbies, building amenity improvements, upgrades to corridors and restrooms, and an upgrade to building systems” were among the renovations the sellers undertook in the years they owned the two office towers, Ridge Capital stated. Ground-floor amenities include a salon school, cafe and a fitness center.

Another major incentive for investors and developers in downtown San Jose: Virtually the entire downtown district is in what is designated as an opportunity zone, an area where certain investments can occur with tax advantages, including deferral, or even elimination, of capital gains taxes, a benefit enabled by President Donald Trump’s tax cut program of 2017.

“The profits are all tax-free, as long as you hold the property for at least 10 years,” Goddard said.

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