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San Jose office building deal shows Bay Area real estate woes linger

Post-COVID Bay Area office market stays feeble

1010 Rincon Circle, an office and research building in north San Jose. 
(Google Maps)
(Google Maps)
1010 Rincon Circle, an office and research building in north San Jose. (Google Maps)
George Avalos, business reporter, San Jose Mercury News, for his Wordpress profile. (Michael Malone/Bay Area News Group)

SAN JOSE — Though a big office building in San Jose has been bought for slightly more than its prior price, the $30 million-plus deal hints at a brutal real estate market in the Bay Area.

Blue Owl Real Estate Capital, through an affiliate, paid $35.5 million for the office building at 1010 Rincon Circle, documents filed on June 10 at the Santa Clara County Recorder’s Office show.

The Chicago-based real estate firm bought the building through an all-cash deal.

Newmark commercial real estate brokers Steven Golubchik, Edmund Najera, Jonathan Schaefler and Darren Hollak arranged the transaction.

The price Blue Owl Real Estate paid is 8.9% higher than the $32.6 million that the seller — a joint venture of Machine Investment Group and Baudpont Capital — paid for the building in November 2021.

Even so, investing in American stocks would have paid out more.

Over the same period from November 2021 through June 10 that the sellers owned the building, the S&P 500 Index — the broadest measure of U.S. stocks — rose 14%.

The local inflation rate also outpaced the building’s value. Bay Area consumer prices rose 11.2% over the same period the sellers owned the office site.

Soon after buying the 90,900 square foot office building, Machine Investment and Baudpont Capital attempted to sell the property by flipping it.

In the spring of 2022, just months after buying the office building, Machine and Baudpont offered the building for sale with an asking price of about $55 million.

At the time, the Bay Area office market’s weakness had yet to come into view in the wake of the coronavirus outbreak that spawned government-mandated business shutdowns starting in March 2020.

In 2022, the tech industry’s waves of Bay Area layoffs amounted to no more than a barely noticeable ripple for the region’s economy.

By 2023, however, the tech sector’s job cuts swamped the commercial real estate market and washed away office building values in the Bay Area.

A growing number of Bay Area office buildings are now being sold for far less than what the sellers paid for them just a few years earlier. And, foreclosures due to delinquent loans have begun to haunt the region’s office market to a significant extent.

These weaknesses in the regional office market are a reminder that some segments of the Bay Area economy have begun to erode due to the economic afflictions that the coronavirus unleashed.

Essentially, buildings that lack tenants can’t generate income so property owners can pay off their mortgages — a dynamic that throttles cash flow and frequently shoves buildings into foreclosure.

In the case of the 1010 Rincon Circle building, which is near the interchange of Interstate 880 and Montague Expressway, the building is fully occupied by a robust tech tenant.

Quanta Cloud Technology, also known as QCT, leases all of the 1010 Rincon Circle building through a long-term rental deal.

QCT provides hardware and cloud-based software for data centers, which are a fast-growing tech industry sector. QCT also is a significant player in the artificial intelligence sector.

“1010 Rincon offers a prime opportunity for a durable cash flow stream, secured for 10 years by a leading AI server company within this state-of-the-art research and development facility,” said Golubchik, a Newmark executive vice chairman.