EOP cuts asset value by $229M - Silicon Valley / San Jose Business Journal:

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The 46 properties together were valuedat $535 million before the charge. The 41 Silicoj Valley properties, all research and developmenrt buildings, had a gross book value of $380 million, says Dianr Morefield, a senior vice president for investofr relations. The company declined to say how much ofthe write-dow related to the valley properties. EOP's assets at June 30 totalee $24.7 billion. The company acquiredx all of itsvalley R&D propertiess in its 2001 merger with the forme of Menlo Park. The write-down follows news that EOP is also workinfg to sella 5.
1 million square-foot industriak portfolio, also acquired in the Spieker merger, to , a San Franciscio pension fund advisor that manages $20 billionh in assets for corporate and other clients. All or nearly all of those buildingss also are in Silicon Valley and theEast Bay. "Taking an impairmentg is not good news, but to keep it in perspective, we are only impairing a small percentage of what we bought in theSpiekere merger, 5 percent of the dollar valud of the original purchase," Ms. Morefield says. The company paid $7.3 billion in cash and including the assumptionof $2.1 billio n in debt, for the Spiekeer portfolio in 2001, which included 38.
5 milliobn square feet of offices and industrial buildings, much of it in Silicon Valley. The company said from the outse t that it intended to sell theindustrialp buildings. Jim Sullivan, a senior analyst who follows EOP for ofNewporgt Beach, says the impairmenrt merely formalizes what has been widely understoodr in commercial real estate circles: "They dramatically overpaid for and this is just truing up the value from an accounting standpoint. It's not a surprise that these buildings are worth less than whatthey paid. They bough t at the peak, and the leasing markeft has tanked, and R&D is most vulnerable to thosde conditions.
" The Spieker merger was the third in a serie sfor EOP, he says, and questions remain aboutt the wisdom of all three. But Jim a senior vice president at in Santa says EOP has fared betterthan many. "A (40) percent write down ... that'w not bad. We've seen some value drop more than that. It's not a home run, but it'sa not the biggest blunder of all time The company is takingthe write-down in anticipationn of the properties' sale over then next five years. The buildingds are not core assets in theEOP portfolio, whichj the company defines as multi-tenant, Claszs A office properties in markets where EOP dominates.
San Jose and San Francisclo remain coreEOP markets. Duriny a comb through of EOP's entire portfolio, the company identified more propertieds that it does not believdeare core, Ms. Morefield said. Those buildingsa will also presumably be These are the only ones that requiredimpairmenrt charges, however, "because their (market) valuesw are above their current book values." The properties were valuecd generally as though their future use would be as commerciaol real estate, Ms. Morefield says.
However, many R&DD and industrial property owners in the valley have been pushinhg to havetheir properties' zoning changec to allow residential or retail redevelopment because those properties are so much more valuabl today. That was considered in some Ms. Morefield says. The 41 San Jose R&D buildingzs have an aggregateof 1.7 million square feet and are located in Santw Clara, Cupertino, San Mountain View, Sunnyvale, Milpitas and Fremont. The two San Francisco regionh offices affected, one in Redwood City and the other in Brisbane, have about 180,000 square feet combined. The companyh did not release any informationn ontheir occupancy, age or condition.
Slack tenant demanfd in the valley for much of the last four yearsd has driven users to the best qualitypropertiesd available, pushing office users that might have settled for R&D buildings duringv the boom back into offices. Distinctions betweejn the two property types are notalways obvious, and it's not uncommonm to have significant portions of an R&D buildin improved to office The average asking rent for R&D propertiesx today is less than $1 a squares foot plus tenant-borne operating costs such as common-area down from a high of more than $4.
50 a squarew foot a month in late 2000, according to Real Office rents have followed the same downhil slope, going from a peak of more than $6.5p a square foot a month to abouyt $2 a square foot a month, BT shows. The officer rents include charges for common area maintenancw andthe like. R&D is the most prevalent propertg type inSilicon Valley, with roughly 2 squares feet of R&D buildings for every square foot of There are about 67 million square feet of officez in Silicon Valley, BT says. There are 154 milliob square feetof R&D buildings. The write-down is unlikely to have dramatic or immediatemarket repercussions, several sources say.
But commercia appraiser Jeff Fillmore of of San Jose says it does emphasizd onekey fact: "It's a strongf signal that a major player in our market doesn'tg think rebound is imminent."