KKR Closes $535M Bay Area Office Deal

HQ @ First. Image courtesy of Digital Sky Aerial Imaging / Newmark.

KKR has acquired HQ @ First in San Jose, Calif., from Mori Trust Co. According to Santa Clara public records, the global investment firm paid $535 million for the fully leased property, through its KKR Real Estate Select Trust (KREST) fund.

According to CommercialEdge data, the sale marks the Bay Area’s largest office transaction so far this year.

READ ALSO: San Francisco’s Construction Starts Jump 114%

Drawbridge Realty, in which KKR has an ownership interest, has been tapped as operating manager for the Micron Technology-leased office campus.

Records also indicate that the sale was subject to a loan, provided by JPMorgan Chase and Barclays. A team of Newmark brokers comprising Vice Chairman and Head of Northern California Capital Markets Steven Golubchik, Vice Chairman Edmund Najera, Senior Managing Director Jonathan Schafler and Director Darren Hollak facilitated the transaction.

According to CommercialEdge data, the property previously traded in 2019, when the Japanese developer acquired the asset for $429 million from Lane Partners in an all-cash transaction. At the time, it was Mori Trust’s second major purchase in the U.S.

In May, KKR announced the launch of KREST, a continuously offered, registered closed-end fund that qualifies for tax treatment as a REIT. KKR announced that the fund will target “thematically-driven, income-generating commercial real estate, prime single-tenant real estate and private real estate debt and preferred equity interests”, in the U.S., Europe and Asia. KKR seeded the fund with $150 million from its corporate balance sheet.

Property characteristics

110 Holger Way includes a 100,000-square-foot data center component.

HQ @ First comprises three buildings at 110, 120 and 130 Holger Way, just off the Southbay Freeway in North San Jose. The campus totals 603,666 square feet across its seven-story buildings, which offer floorplates ranging from 19,310 to 32,563 square feet. According to CommercialEdge, the 135,167-square-foot building at 110 Holger Way also features 100,000 square feet of data center space.

The Class A office campus—constructed in 2010—features a two-story lobby, conference rooms, a fitness center and cafeteria space with more than 300 seats. The current tenant has made improvements to the space, including modern office finishes and the addition of 60,000 square feet of lab space. Office workers also have access to a multi-story parking garage offering a ratio of 3.16 spaces per 1,000 square feet.

According to the U.S. Green Building Council, the property received LEED Gold certification in 2011, back when it was still occupied by Brocade Communications (now a subsidiary of Broadcom Inc.). It is unclear if the property was submitted for recertification.

Micron Technology has agreed to fully occupy the campus in December 2018, according to CommercialEdge data. A document filed with the SEC in 2019 reveals that Micron Technology has subleased approximately 68,962 square feet to Zscaler, a digital security company. HQ @ First serves as Micron Technology’s West Coast headquarters.

The property is situated in the heart of Silicon Valley, with many large tech players nearby, including Oracle, Intel, Western Digital and Cisco Systems, among others. HQ @ First benefits from frontage along the Southbay Freeway, while Interstate 880 is roughly 3 miles to the East, and downtown San Jose about 8 miles away.

Investments soar in Silicon Valley

HQ @ First was acquired by KREST at roughly $886.2 per square foot, well above the Bay Area’s average $505 price per square foot recorded in year-to-date office sales through June. Office vacancy in the Bay Area market—including the East and South Bay—reached 18.6 percent in June, a drop of 30 basis points month-over-month.

However, investors are pouring money in tech and life sciences, as the Bay Area market recorded several other large deals over the past two months. According to CommercialEdge data, office sales generated a total of $364.4 million in June—with sales such as GI Partners’ $155 million purchase in Hayward, Cailf. In July, the value jumped to more than $1.4 billion in total office sales, marked by deals such as LinkedIn’s $323 million acquisition of its HQ.