San Jose office building is bought at higher price, in market rarity

SAN JOSE — A big office building in north San Jose has been bought for more than $60 million in a deal that represents a rarity in a fading Bay Area commercial real estate market: The property was sold at a profit.

The building, located at 3011 North First Street in San Jose, was bought for $63.6 million, according to documents filed on Aug. 6 with the Santa Clara County Recorder’s Office.

Klein Investments Family Limited Partnership, a real estate firm located in Orange County, bought the building, the county records show.

Cannae Partners and Blue Vista Capital Management, acting through an affiliate, sold the building to Klein Investments.

Newport Beach-based Klein Investments also obtained a $50 million loan from Northern Trust Co. to help finance the purchase.

Here’s why this deal appears to differ from the typical trend in office property sales.

The $63.6 million purchase was above the current assessed value as calculated by Santa Clara County officials and what the sellers paid in 2021 for the office building, which totals 146,200 square feet.

The estimated value of the office building as of January 2024 was $52.7 million, the Santa Clara County Assessor’s Office reported, which points to an increase of 20.7% in the value of the building.

In 2021, the selling group paid $49.6 million for the office building. That places the latest price 28.2% above what the sellers paid three years ago.

Throughout the Bay Area, office building values have nosedived. This means the rising value for the 3011 North First Street property’s upswing contrasts starkly with the region’s dismal trends.

In numerous instances, Bay Area office building values have plunged by two-thirds — or even more — compared to their assessed values or prior purchase prices.

Record-high vacant offices have undermined rental rates and the value of the buildings.

In the case of the north San Jose office building, the selling group has managed to keep the building full.

In March, the owner secured a long-term lease renewal with the building’s only tenant, Intermolecular Inc., which produces cutting-edge materials.

Property values have impacts that go well beyond the effects on the owner of a building or plot of land. Real estate values also are used to determine the property tax that can be levied on a parcel.

Property tax revenues, in turn, are crucial funding sources for school districts and local, county and regional government agencies.

Rising real estate values tend to produce higher property taxes and more revenue. Periods of sluggish growth in property taxes squeeze revenue that flows into government coffers.

As a result, the current widespread trend of collapsing commercial real estate values can jeopardize a crucial funding source for an array of government or public agencies.