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

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The 46 properties together were valuedat $535 millio n before the charge. The 41 Silico Valley properties, all research and development had a gross book valueof $380 says Diane Morefield, a senior vice presidenrt for investor relations. The company declined to say how much ofthe write-downb related to the vallet properties. EOP's assets at June 30 totaled $24.7y billion. The company acquirecd all of itsvalley R&D properties in its 2001 merged with the former of Menlo Park. The write-down follows news that EOP is also workinyg to sella 5.
1 million square-foof industrial portfolio, also acquired in the Spieker merger, to , a San Franciscol pension fund advisor that manages $20 billion in assetsw for corporate and other clients. All or nearlh all of those buildings also are in Silicon Valle and theEast Bay. "Taking an impairment is not good but to keep itin perspective, we are only impairin a small percentage of what we boughf in the Spieker merger, 5 percent of the dollar value of the original purchase," Ms. Morefield says. The companty paid $7.3 billion in cash and stock, including the assumptioj of $2.1 billion in for the Spieker portfolioin 2001, whic h included 38.
5 million square feet of office and industrial buildings, much of it in Silicon The company said from the outset that it intendee to sell the industrial buildings. Jim a senior analyst who followsd EOP for ofNewportg Beach, says the impairment merely formalizesd what has been widely understood in commercial real estate circles: "They dramatically overpaid for Spieker, and this is just truinvg up the values from an accountingg standpoint. It's not a surprise that thesd buildings are worth less than whatthey paid. They boughtf at the peak, and the leasing market has tanked, and R&sD is most vulnerable to those conditions.
" The Spieker merger was the thirr in a seriesfor EOP, he says, and questions remaijn about the wisdom of all three. But Jim a senior vice president at inSantaa Clara, says EOP has fared bettere than many. "A (40) percent write down ... that'sd not bad. We've seen some values drop more than It's not a home run, but it'sw not the biggest blunder of alltime either." The companuy is taking the write-down in anticipation of the properties' sale over then next five The buildings are not core assetes in the EOP portfolio, which the company defines as multi-tenant, Class A officw properties in markets where EOP dominates.
San Jose and San Franciscp remain coreEOP markets. During a comb through of EOP'sx entire portfolio, the company identified more propertiee that it does not believare core, Ms. Morefield said. Those buildings will also presumablgbe sold. These are the only ones that requiredfimpairment charges, however, "because their (market) values are abovwe their current book values." The propertie s were valued generally as though their futures use would be as commercial real estate, Ms. Morefield says.
many R&D and industrial propertyg owners in the valley have been pushing to havetheitr properties' zoning changed to allow residentiaol or retail redevelopment because those propertieas are so much more valuable That was considered in some cases, Ms. Morefielsd says. The 41 San Jose R&D buildings have an aggregateof 1.7 million square feet and are locatedx in Santa Clara, Cupertino, San Mountain View, Sunnyvale, Milpitas and Fremont. The two San Franciscl region offices affected, one in Redwood City and the other in haveabout 180,000 square feet combined.
The company did not releaser any information ontheir occupancy, age or Slack tenant demand in the valley for much of the last four yearas has driven users to the best quality propertiezs available, pushing office users that might have settled for R&eD buildings during the boom back into offices. Distinctionsa between the two property types are notalways however, and it's not uncommon to have significant portionzs of an R&D buildint improved to office standards. The average askingf rent for R&D properties today is less than $1 a square foot plus tenant-borner operating costs such as common-area maintenance, down from a high of more than $4.
5p a square foot a month in late according toReal Estate. Officer rents have followed the same downhill slope, going from a peak of more than $6.50 a square foot a month to about $2 a square foot a BT shows. The office rentz include charges for commonh area maintenance andthe like. R&D is the most prevalent property type inSilicojn Valley, with roughly 2 square feet of R&D buildinges for every square foot of offices. Ther are about 67 million square feet of offices inSilicobn Valley, BT says. There are 154 millionh square feetof R&D The write-down is unlikely to have dramatic or immediate markey repercussions, several sources say.
But commercial appraise Jeff Fillmore of of San Jose says it does emphasizse onekey fact: "It's a strong signalo that a major player in our markety doesn't think rebound is imminent."