As part of the history of San Francisco since 1898, the office-heavy Ferry Building has seen its star both shine and fade over the years. Today, the historic property is attempting a comeback.

In October, a leasehold interest in the property was acquired for an all-cash price of $291 million through a joint venture between the publicly traded office REIT Hudson Pacific Properties (with a 55 percent stake), and Munich-based insurer Allianz’s real estate business (45 percent).

The leasehold means the partners own the property itself, combined with a ground lease with the Port of San Francisco for the coming 49 years. The interest was sold by Chicago-based EQ Office, an affiliate of Blackstone Group.

The Ferry Building is located on the Embarcadero on the north-eastern part of the San Francisco Peninsula, close to the city’s financial district. On top of its notable 245-foot-tall clock tower, the property today contains 192,532 square feet of office space and 75,486 square feet of retail.

As the name implies, the adjacent ferry terminals create a footfall that in coming years is expected to increase from 10,000 people passing through daily to 24,000, due to an expansion of the terminals, according to Hudson Pacific.

The Ferry Building is close to stations for railway, buses and San Francisco’s trademark cable cars, so that footfall is slated to grow. Its marketplace, a public food market, already attracts more than 8.8 million visitors a year, according to Allianz. On the office side, Alexander Vouvalides, Hudson Pacific’s chief investment officer, tells PERE that several leases are up at the end of 2019, some estimated at close to 50 percent below market rent levels.

Together with general operational improvements and ongoing rent increases, the expectations are to improve the asset’s cashflow significantly in coming years. At press time, return targets from Hudson Pacific and Allianz were not available. However, Allianz is typically a core investor in the US, and that strategy’s gross total return for the last 12 months stood at 8.68 percent, as of the end of September 2018, according to the National Council of Real Estate Investment Fiduciaries. Meanwhile, the funds through which Blackstone owns the EQ Office assets averaged a total return of 12 percent, as of end of September 2018.

Earthquake turning point

While the Ferry Building’s future looks promising, its history has been mixed. It was built in 1898 and enjoyed almost 40 years of productivity. But the 1936 opening of the San Francisco-Oakland Bay Bridge delivered a major blow. Proximity to the bridge meant the Ferry Building was cut off from the rest of downtown during California’s years of freeway expansions. The subsequent rise of car traffic saw the building live in the shadows of state highway Route 480 for decades. The building was adapted to office use and its public spaces broken up.

The next twist came following damage by an earthquake in 1989. Route 480 was demolished two years later. Throughout the 1990s a comprehensive port development plan aimed to revitalize the newly cleared space, increase public access to the waterfront and reintroduce the ferry service.

After nearly 10 years of public review, a consortium, led by local developer Wilson Meany Sullivan with Equity Office Properties as a capital provider, was selected to proceed with renovation. Over the course of four years to 2003, the consortium refurbished the Ferry Building for mixed-use.

Then, in February 2007, private equity real estate giant Blackstone purchased the then-listed REIT Equity Office Properties, today rebranded EQ Office, in a transaction valued at $39 billion, still the largest real estate deal of all time. Blackstone is today all but exited from the original Equity Office portfolio, making the sale of the Ferry Building among the last of this seminal transaction.

With the asset acquired by its limited life Blackstone Real Estate Partners global opportunity funds, Hudson Pacific was among a number of suitors long anticipating a sale once Blackstone finished its own works, particularly in leasing.

Hudson Pacific and its European partner, stable asset hunters by nature, will be hoping these works, alongside the area’s infrastructure boost, will keep the building benefiting from the Bay Area’s fortunes, and not again be penalized by them.