Florida SBA sells San Francisco office tower for $521m

The $176.5bn pension system bought the building in 1996 for $103m.

The Florida State Board of Administration (SBA) has sold a San Francisco trophy office tower that it owned for 20 years for more than five times its original purchase price.

New York-based Paramount Group bought One Front Street for $521 million, the real estate investment trust said Monday. Florida SBA, which declined to comment, originally purchased the 38-story building in the city’s financial district for $103 million in October 1996, according to real estate data provider Real Capital Analytics. Built in 1979, the 651,000 square foot office property is 99 percent occupied.

“We expect that our proven, pro-active management approach will meaningfully increase the net operating income from the property in the near to medium term as the existing leases, which are approximately 20 percent below market, expire,” said Albert Behler, Paramount’s chief executive. “In addition, we are evaluating certain redevelopment opportunities, which could unlock additional value in the next three to five years.”

The firm said it is weighing options in connection with the deal, including bringing in a joint venture partner at the property or selling an asset within its portfolio as part of a 1031 exchange, where the capital gains tax on a property sale can be deferred if a similar asset is purchased within a limited period of time. The One Front Street deal is expected to close in the fourth quarter of 2016.

Florida SBA sold the building amid skyrocketing valuations for San Francisco offices. The average price per square foot for office properties in the city’s central business district reached $608 in the second quarter of 2016, nearly doubling from $332 in the second quarter of 2015, according to RCA. One Front Street sold for about $800 per square foot, according to Paramount.

Florida SBA’s real estate investments have buoyed the pension system’s returns. The asset class returned 13.4 percent over five years as of June 30, compared with an overall portfolio return of 5.4 percent, according to its most recent performance report. The pension system, which managed $176.5 billion as of June 30, had 9.4 percent of its portfolio invested in real estate.