Pacific blues

The Pacific Shores Center was the right building at the wrong time, but it was still able to go from dot-com bust to post-bubble boom.

The Pacific Shores Center rises like a modern steel and glass cathedral on the banks of the San Francisco Bay. Featuring 1.7 million square feet of office space spread across ten buildings, the complex also houses a 50-acre park with walking trails and athletic fields and a 38,000 square foot gym with a heated outdoor pool. A former dredging site for cement manufacturing, Pacific Shores now stands as a testament both to the excess of the dot-com era as well as the recent resurgence of Silicon Valley.

San Francisco developer Jay Paul, with equity backing from Chicago private equity real estate firm Walton Street Capital, broke ground on Pacific Shores Center in the heady days of the dotcom boom, but the complex was not finished until 2002, long after the bottom had dropped out of the market. When construction began in 1999, approximately 90 percent of the complex was pre-leased.

Three years later, almost half of the buildings were vacant. Excite @ Home, an internet broadband provider and one of the era’s biggest flameouts, was supposed to be Pacific Shores’ cornerstone tenant, but the company never even moved in—by late 2001, it had filed for bankruptcy. “They built a city and no one came,” Jamis McNiven, owner of the nearby diner Buck’s of Woodside, told the magazine Fast Company.

Yet even before the bubble burst, Pacific Shores was not an easy real estate deal. The land sits adjacent to one of the country’s largest urban wildlife parks, the Bair Island and San Francisco Bay National Wildlife Refuges, which necessitated a significant amount of environmental review—according to Pacific Shores’ website, approximately 135 acres of wetlands were restored during construction. The parcel was acquired in 1989, but it was not until ten years later that entitlements were finalized—the Illinois State Teachers’ Retirement System funded the entitlement process before selling it to the Jay Paul consortium, which spent $500 million (€650 million) on construction.

Despite its turbulent history, the office complex (and its owners) survived intact. A $10 million letter of credit from Excite @ Home reportedly helped cover rent and debt service payments until a big-name tenant—Dreamworks, the film company founded by Steven Spielberg, Jeffrey Katzenberg and David Geffen—moved in. Today, the resurgence of the Silicon Valley property market—and no doubt the allure of walking trails and soccer fields—have attracted a growing number of tenants. Healthcare company PDL BioPharma, for one, recently agreed to move their headquarters to the property. At the end of 2006, Pacific Shores Center was approximately 90 percent leased.

The renewed vitality in the market is attracting private equity real estate firms as well. In addition to major purchases by Blackstone and RREEF, Starwood Capital recently made its first investment in the Silicon Valley area. Its target: Pacific Shores, which it agreed to acquire for a reported price of $825 million last December.