The sellers of a San Jose office tower doubled their money in four years, recently selling the property for more than $80 million — a record for downtown and a sign that the area is in the midst of an upswing.

AEW Capital Management purchased the Class A office tower at 303 Almaden Blvd. for $80.15 million, more than twice the amount that the sellers, Rockwood Capital and Four Corners Properties, paid for the 11-story building just a
few years ago.

The deal for the 157,537-square-foot building,
which closed July 6, works out to nearly $509 per square foot — a record price per square foot for downtown San Jose, although at least one
other building, in north San Jose, sold for more than that earlier this year.

Previously, the downtown price per square foot record was set at about $468, per Costar records. That was for a 2015 sale of 50 W. San Fernando St. for $165.5 million to Rockpoint Group LLC.

See below the table below for the largest downtown San Jose office space transactions, ranked by price per square foot

The sale price for 303 Almaden is particularly noteworthy because it shows how much the downtown San Jose market has shifted in a few short years. In 2013, Boston Properties let go of the tower at a loss, saying the downtown San Jose submarket hadn’t lived up to the company’s expectations.

Rockwood purchased 303 Almaden, commonly known as the Ernst & Young building, from Boston Properties for $40 million at that time. Boston Properties had previously purchased the building for $45 million in 2006.

“The downtown San Jose market hasn’t experienced the level of activity we hoped for in the market, so we’re rethinking our plans,” Boston Properties President Douglas Linde said in 2013, according to Globe Street, though he noted that he still had confidence in other areas of Silicon Valley, adding: “We view the Palo Alto/Mountain view area as having great potential.

”It’s worth noting that Boston Properties had owned the building through the worst of the Great Recession, Blage Zelalich, the city of San Jose’s downtown manager, said in an interview Tuesday.

“You can kind of see where if you held onto [the building] for seven years and some of that time was not the greatest economic times, then maybe by the end of that — as things are coming up — you probably have a different perspective than somebody who is relatively new to that market,” she said.

But in the last couple years, downtown San Jose has turned a corner that many didn’t predict.

Representatives from Rockwood declined to comment on the transaction Tuesday, but Colliers International data from 2013, when the New York-based investor bought the building, show the office vacancy rate in San Jose sat at more than 16 percent, which was considered low compared to previous quarters around that time.

Now, office vacancy sits around 9 percent in San Jose, and Costar records show that Pearson, Inc. in April signed a 15,524-squarefoot lease for the fifth floor of the building. Building permits on the city of San Jose’s website also show that Rockwood initiated tenant improvements for Pearson in recent months.

That level of vacancy typically marks a point at which office rents really start rising in a market, Anne Ralston, senior managing director at Newmark, said in an interview Tuesday.

Meanwhile, the city is preparing for a major building boom in downtown, including hundreds of thousands of square feet in commercial space and more than 6,000 residential units currently in the pipeline, many of which will rise in tall towers reaching more than 20-stories high.

Google is also in talks with the city to purchase several key parcels that would allow the Mountain View-based tech giant and its development partner, Texas-based Trammell Crow, to build up to 8 million square feet with a mixed-use development in the city’s downtown next to Diridon Transit Station.

The transit station over the next decade is slated to see more than $8 billion in investment through an electrified Caltrain line, a BART extension and eventually, high-speed rail.

Though the high-profile news of Google eyeing San Jose likely had a part in driving up the price of 303 Almaden, Ralston doubts it was the only factor at play for the record-setting price in downtown.

“Since 2014 prices have started to climb up,” she said. “I think it has more to do with transit and the high level of traffic that everybody is experiencing. That is what most tenants would tell you — it’s ‘We need to be at the train station.’ “

As other areas around the ever-popular Caltrain stations along the Peninsula fill up with developments, downtown San Jose, which has a baby bullet stop that lets riders hop on express trains during peak hours, “was kind of the next place to explode,” Ralston added.

Indeed, Zelalich characterized Google’s potential landing in San Jose as a helpful boost to everything else that is already happening in the San Jose real estate market as buildings around downtown continue to sell at higher prices than they have in the past.

“Google coming in and us making that announcement about their interest certainly helps to validate the market and validate that positive momentum,” she said. “But if Google wasn’t already aware of the positive momentum and the good things that were happening, they probably wouldn’t have wanted to make that announcement.”

Combine that momentum and the Google interest with the work that Rockwood put into the building since they purchased it, and it’s no surprise that 303 Almaden made a splash when it traded hands, Zelalich added.

“Rockwood came in and made some major improvements in the building and gave it some amenity space, and gave it a refresh and refurbish,” she said.

City of San Jose building permit records show that at least 14 tenant improvement permits have been issued for the building since 2013.

Permits in recent months show an estimated value of nearly $1 million. Four Corners Properties’ portfolio listing for 303 Almaden notes that the group designed and implemented “a comprehensive renovation plan in the building lobby, fitness center, outdoor area, and upper level full floors,” which helped to retain their major tenant, E&Y, and attract new ones.

Though Boston Properties wasn’t bullish on the office market for San Jose in 2013, it still owns multiple parcels totaling more than 3 acres in total directly adjacent to 303 Almaden. Those parcels were once entitled for more than 800,000-square-feet in office development, Business Journal reporting from 2006 shows, but today that land is being used primarily as a surface parking lot.

The 303 Almaden sale may set a record for the downtown market, but it’s not the largest sale that San Jose has seen this year. In May, a North San Jose office building at 2851 Junction Ave., home to longtime tenant Taiwan Semiconductor Manufacturing Co., sold for $82 million, or nearly $530 per square foot.

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This story has been updated to reflect new tenants in the 303 Almaden building.

Janice Bitters

Commercial Real Estate Reporter

Silicon Valley Business Journal