Kilroy to Develop 587 KSF Silicon Valley Office Project for LinkedIn

By Gail Kalinoski, Contributing Editor

Kilroy Realty Corp. has acquired a 12-acre parcel in Sunnyvale, Calif., where it will build a 587,000 square-foot office complex for LinkedIn Corp. under a 12-year leasing agreement and development deal worth $315 million.

While this was certainly a big deal, it wasn’t the only major transaction the Los Angeles-based REIT made this week. Kilroy also signed a long-term lease with Salesforce.com, a leader in enterprise cloud computing, to take all the space in the 27-story tower it is building at 350 Mission St. in San Francisco’s South of Market submarket. Kilroy estimates development costs to be at least $250 million and possibly $275 million if it gets approvals to add three more stories to the building, topping it off at a total of 445,000 square feet.

If that wasn’t enough, the REIT also sold off its entire Orange County industrial portfolio and two small office projects for a total of $355 million. The sale of the 44 West Coast properties in two tranches to two unidentified institutional buyers was part of the firm’s capital recycling strategy and will be reinvested in Kilroy’s office developments.

“It is already being put to good use,” Mike Sanford, senior vice president, Northern California region, said of the proceeds from the dispositions.

“These transactions reflect a milestone for the company as it moves forward with its value creation strategy of acquiring, repositioning, redeveloping and developing high-quality office space in the best West Coast markets,” said John Kilroy, Jr., president and CEO.

The two major leasing deals announced this week bring the number of fully pre-leased office projects Kilroy is developing for Silicon Valley and San Francisco-based technology firms to four. In May, Kilroy said it was investing about $200 million to construct a 314,000-square-foot office campus for Synopsys Inc. in Menlo Park, Calif. Combined with leases from LinkedIn, Salesforce.com and Audience Inc., Kilroy has a total of 1.5 million square feet of pre-leased space under construction.

A fifth project, a six-story, 175,000- to 180,000-square-foot building at 333 Brannan St. in San Francisco’s SOMA neighborhood, is still in the approval and design phase, Sanford said. Marketing to prospective tenants will begin in 2013.

“There’s got to be a new record for 1 million square feet of new tenants in a few days,” Sanford said of the LinkedIn and Salesforce.com deals.

Kilroy acquired a 12-acre, fully-entitled land site at Maude and Matilda avenues in Sunnyvale from JP DiNapoli Companies. The purchase price wasn’t released, but Kilroy executives said the total project costs should be about $315 million. The plan calls for Kilroy to build three mid-rise Class A office buildings and a parking structure, all designed and pre-certified to meet LEED silver requirements. The complex should be completed in the second half of 2014.

DiNapoli reportedly had several parties interested in the property, which currently has several one- and two-story buildings on it.

“There’s a lot of great firms out there. For us, it’s about the ability to deliver and close a complex transaction like this,” Sanford told Commercial Property Executive. “The marketplace knows we have the capacity to deliver, especially on one as expensive as this one. We have the wherewithal and the expertise.”

Sunnyvale, home to tech giants like Apple, Yahoo! and AMD, has a Class A office vacancy rate of less than 5 percent and is a highly sought-after location. Sanford said LinkedIn, which operates the largest professional network on the Internet, already has some office space in Sunnyvale and its corporate headquarters is in nearby Mountain View, Calif.

Sanford said there isn’t much vacant land in Silicon Valley’s best submarkets like Sunnyvale.

“There are a number like this one with older, gentrified, almost obsolete buildings,” he said. “If you can assemble them, you can create a plan and turn it into a campus like we’re doing here.”

On Tuesday, a day before announcing the LinkedIn project, Kilroy said it had reached a deal with Salesforce.com to take 100 percent of the space at 350 Mission St., a SOMA office tower to be built across the street from the city’s new Transbay Transit Center. Sanford said Kilroy purchased the property two months ago “with the intent of going to spec based on demand from the marketplace.” Eight weeks later, after interest from a total of seven firms, Kilroy signed Salesforce.com as the tower’s sole tenant. The building is being designed by Skidmore, Owings & Merrill L.L.P. and it is expected to become the first ground-up commercial building in San Francisco to get a LEED platinum certification when it is completed in 2015.

Sanford said the six other firms interested in the office building were a combination of tech and non-tech companies, all with great credit.

“It was an ideal fit for them,” Sanford said of Salesforce.com, a growing company that already has space in SOMA near the new site. “They were the most ready to move and make a decision.”

Sanford said Kilroy management made the decision nearly three years ago to seek out projects in Northern California to diversify the portfolio, which was primarily Southern California-based.

“We didn’t have anything in Northern California two and a half years ago, now we have 4.3 million square feet,” he said.

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