Hines and CalPERS Commercial Foreclosures in San Francisco

Houston-based Hines Interest has been recognized as a blue-chip property investor and developer for decades in California, but the sharp declines in demand for office buildings, declines in commercial real estate prices and lack of commercial loans have put several Hines properties in California into commercial foreclosures and tarnished its top-of-the-class image.

Hines and its partners are giving back 3 properties in the Bay Area to lenders: the 333 Bush Street building, the Marin Commons office tower in San Rafael and the Watergate office complex in Emeryville.

The property on 333 Bush Street is being foreclosed by Munich Hypo Bank and Brookfield Real Estate Finance while Marin Commons was foreclosed by Connecticut General Life Insurance Co.

Meanwhile, three buildings at the four-building Watergate office complex have been declared in default by Pacific National Bank by filing a default notice in Alameda County. The office complex is a large investment that Hines acquired through a joint venture called NOP Watergate LLC created with the California Public Employees’ Retirement System.

In late 2006, Hines and CalPERS bought the Watergate office complex with an area of 1.2 million square feet for $335 million. The purchase included a restaurant building separate from the 4-building complex. The investment had high profit prospects at the time because of rising rents and property valuations.

The fourth building which is not included in the default filing is owned by Hines REIT and is 100-percent leased to Novartis and Oracle.

The impact of the default on CalPERS will not be known publicly until August when CalPERS releases its performance report on its repo home investments for the first quarter.

In the CalPERS financial performance report for the year 2008 released in May, its core real estate investments lost 5.2 percent in the fourth quarter last year and lost 6.2 percent for the entire 2008. Its non-core investments lost 13.6 percent in the fourth quarter and lost 38.7 percent for the entire year.

The performance of its core property investments was clobbered by poor results in the office and retail sector and in its AFL-CIO Building Investment Trust. The values of assets in the 3 categories of property investments went down by 13.1 percent, 22.1 percent and 101 percent respectively.

Nevertheless, despite the difficulties faced by Hines in some of its projects, Hines executive VP Paul Paradis reiterated that most of Hines property investments have strong cash flows and that Hines is still a strong corporation in California, the U.S. and other parts of the world.

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