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Boston Properties execs talk Silicon Valley buy

has made astrategic office acquisition in the sought-after Silicon Valley market, and companyexecutives discussed the potential they see for the property during an earningscall.

The companyacquired a 218,000-square-foot building at 3625-35 Peterson Way in Santa Clara,Calif., for $78.0 million. Leased to one tenant through 2021, Boston Propertiesplans to entitle the property for a roughly 630,000-square-foot office campus duringthe remaining lease term, CEO Owen Thomas said on an earnings call.

"So the way to think about pricing is we're paying $123a square foot for unentitled land while receiving a 4.6% cash yield as we entitleand pre-lease a new upsized office complex," he explained.       

President Douglas Linde noted that Boston Properties' portfolioin the Silicon Valley market, one he said it "definitely wants to be a partof" given favorable leasing and user activity, is "unfortunately … prettysmall," comprising 570,000 square feet of Mountainview single-storyproduct, a 141,000-square-foot stand-alone office building in Mountainview and aland/redevelopment parcel on North First in San Jose.

"Thedifficulty we've been having over the last four or five years is finding high-qualitybuildings or sites with an acceptable basis/return ratio," Linde said. "ThePeterson Way site offers an opportunity for us to deliver product in 2023 at a costbasis of under $700 a square foot — and that assumes cost escalation on the costside of the equation in terms of our building materials, labor, etc. — and an initialreturn in excess of 7% at rents that are less than 10% above market rents today."

Linde noted that while Google and Apple are the dominant usersof space in the market, there are other growing companies — Facebook, Broadcom,VMWare, among others — looking for new, modern, efficient product. "So thisis what we're going to hopefully build, and this is the demand that we're goingto satisfy," he said.

BostonProperties in general is seeing an increase in value-add and development opportunitiesin its core markets as it analyzes acquisition opportunities, Thomas said. It iscurrently working on several additional acquisitions along those lines.

In otherrecent transactions, the company closed its sale of 415 Main St. in Cambridge, Mass., to MIT in Februaryfor a gross sale price of $105.4 million. MIT exercised its option to purchase the 231,000-net-rentable-square-footproperty in October 2014. Net cash proceeds were about $104.9 million, resultingin a gain on sale of about $60.8 million. Boston Properties plans to sell $200 millionto $250 million of noncore assets during 2016.

Alsoin February, a tenant paid Boston Properties $45.0 million in consideration forterminating an 85,000-square-foot lease at 250 W. 55th St. in New York City. Thelease had been scheduled to expire in 2035.

Thomasalso noted on the call that the company has made an initial submission to the cityof Boston to develop an additional site at Back Bay Station, a project that couldultimately represent 1.3 million square feet of office, retail and residential space.The project still requires various approvals and would not start before late 2017.

The companyhas also begun predevelopment work for a Metropolitan Transportation Authority projectat 343 Madison Ave. in New York City. It will acquire a 99-year ground lease andbuild an up-to-900,000-square-foot office tower. The development of the projectis several years out, Thomas said.