Hunter/Storm sells Village Oaks to Donahue Schriber for $111M

Looking to make a splash in Silicon Valley, Costa Mesa-based Donahue Schriberhas paid $111 million for Village Oaks, the brand-new shopping center in south San Jose.

The closely watched sale is one of the more significant retail transactions in recent years and shows the depth of demand for well-leased, Class A shopping center assets, experts said.

The seller is Hunter/Storm LLC and joint-venture partner PCCP, which completed the 320,000-square-foot center last year. The project quickly landed Target, Marshall’s, Safeway, Petco and a slew of eateries and smaller space tenants such as Panera.

“The quality of the real estate, the tenants, and the fact that it was developed by one of the best developers up there in Hunter Properties made it a pretty easy to see it was something we wanted,” David W. Mossman, Donahue Schriber‘s chief investment officer, told me in a phone call today.

Executives at Hunter/Storm weren’t immediately available. JLL’s Erik Doyle, who marketed the property on behalf of the seller with colleague Will Connors, didn’t return a phone call.

The sale includes 175,000 square feet of building area, because Target owns its own store. The price works out to about $634 per square foot based upon the acquired square footage, and the transaction is expected to produce an initial cap rate — a key measure of yield — of just below 5 percent, according to a person familiar with the transaction. Donahue Schriber declined to discuss the numbers.

“I think it just reflects the value of the quality of the asset,” said James Chung of DTZ, who leased the center with colleague Todd Oliver. “It’s such a rare combination to have those two powerhouses barbelling a shopping center and merchandised so well in between. What we’re finding is these retailers are having high-performing units from an average sales-per-unit standpoint.”

Donahue Schriber is a privately held real estate investment trust that invests on behalf of two capital partners — the JP Morgan Strategic Fund and New York State Teachers Retirement System. The partners own 71 shopping centers, focusing on coastal California, the state’s Central Valley, as well as Portland and the Seattle region. The company does ground-up development as well as acquisitions.

The San Jose pickup marks a turning point for Donahue Schriber in the Bay Area. The company about a year ago acquired Downing Center, a 72,000-square-foot Safeway-anchored center in Los Gatos. The buyer spent about $1 million square feet on property improvements and has attracted new tenant interest in vacant spaces there, Mossman said.

But the Village Oaks deal represented a different kind of deal — a “core” asset as opposed to “value-add,” Mossman said.

“New construction in a high-barrier-to-entry market such as San Jose is the initial attraction, but when you have the type of anchor tenants starting with Target and Safeway, it doesn’t get much better than this,” he said.

The project’s location at Highway 85 and Cottle Road is in the thick of a massive redevelopment of excess land on the former IBM disk drive campus. Along with Village Oaks, hundreds of homes have sprouted recently from City Ventures, Lennar and St. Anton Partners. HGST, which now owns the remaining manufacturing and R&D space there, is also undertaking a major expansion. (Read more here, here and here.) There is also a new Costco slated for the other side of this huge site (click here for more.)

“I look and it and say, how could I replace that in Santa Clara County? The answer is, You can’t,” said John Machado, a veteran retail broker with Colliers International who was not involved in the deal. “It’s off of Highway 85. It’s in an area that just wasn’t being served. And it has all the new housing around, which is really high-density housing.”

“I think it’s a planner’s dream when you have 1.4 million square feet of office within a couple miles, you have all the residential already there — not to mention the thousands of residential units coming online,” Mossman said. “Everyone wants the work-life-shop, all together. And then you have a transit station close by too.”

Donahue Schriber hopes to make more investments in the area, Mossman said. Already, the company is in contract on a retail center in Berkeley.

“We would either acquire existing, or do redevelopment,” Mossman said. “We were looking to plant a flag in a market where we would love to own more.”