California expects strong demand when it sells state buildings

In putting an estimated $2 billion worth of real estate up for sale during a horrific recession, state officials say the properties' trophy value will outweigh the severity of the real estate slump.

Although commercial property values have fallen as much as 35 percent in the past couple of years, private investors are hungry for quality real estate that is completely leased up, said Fred Aguiar, secretary of the State and Consumer Services Agency. The state would lease the buildings back for 20 years.

"There's a huge appetite," said Doug Button, project director at the Department of General Services. "We think we're going to be overrun with interest."

Aguiar and Button, in an interview Tuesday with The Bee's editorial board, insisted they'll pull the buildings off the market if the prices aren't right.

In an effort to raise cash, the state is proposing to sell 11 different properties, including the giant East End Complex next to Capitol Park and the Attorney General Building on I Street in downtown Sacramento. The plan has raised questions among some private analysts about the wisdom of trying to sell huge assets in one of the worst real estate markets in decades. The project represents 17 different buildings and 8 million square feet of space.

Despite the down market, Aguiar and Button said the leaseback provision would give the state a big edge. The Class A office vacancy rate in greater Sacramento is 18 percent, according to market researcher CoStar Group. Guaranteeing an investor a fully occupied property makes the state's buildings extremely attractive, state officials said.

While the state hopes to sell the buildings for a combined $2 billion, the bond debt on the properties would leave a profit of about $600 million.

The state wants to put the buildings on the market next year but could end up staggering the different properties, Aguiar said. The entire process could take up to six years, he said, and the state could choose to withdraw some buildings if sufficient demand doesn't materialize.

"We're not compelled to sell" all the properties, he said.

Source Sac Bee