Strada Investment snags San Francisco office tower at steep discount

Strada Investment Group and an equity partner have picked up a 252,600-square-foot office building in San Francisco after acquiring a $125 million defaulted loan for half price.

The San Francisco-based investor and unidentified partner took control of the 18-story tower at 201 Spear Street after buying the debt from PGIM Real Estate Finance, which had originated the loan to a fund by Newport Beach-based KBS Realty Advisors, the San Francisco Business Times reported.

The KBS fund bought the South Financial District building in 2013 for $121 million, or $465 per square foot. The fund defaulted on its loan in November after failing to make its monthly payment.

Strada and its partner bought the debt tied to the building for $67.25 million, an unidentified source told the Business Times. The all-cash deal works out to $266 per square foot.

KBS then tossed the keys to the Class-A building to Strada in lieu of foreclosure. The two-part deal closed this week.

The deal is among the largest to close since San Francisco office properties began trading again this summer after two years of limited investment sales, according to the Business Times.

A reset of office values to between $200 and $300 per square foot will enable landlords to rent offices at lower rates, drawing tenants to fill the city’s hollowed out offices. Local investors such as Strada now see the value in such buildings, and are snapping them up, according to The Real Deal.

Jesse Blout, a founding partner at Strada, said the firm, a tenant in the building, acquired it because of its quality and location. KBS also kept the building well-maintained, he said, so it requires little capital investment. 

“We felt like even before COVID, the market was more of a momentum market than a value market,” Blout said of San Francisco office properties. “People were investing on momentum rather than value. At the basis we are buying, this is a true value play.”

A slump in value of the 39-year-old office building near the Embarcadero reflects the fall of San Francisco’s once robust office market, where nearly 36 percent of offices stand empty. 

In 2019, the brown accordion-faced tower with waterfront views was 97 percent leased.

By last March, its occupancy had dropped to 65 percent — half taken by New York-based WeWork, now bankrupt. Google, a WeWork tenant, was set to pull out last month. Should WeWork leave, occupancy would drop to 30 percent.

The office building is the latest to trade hands in Downtown San Francisco at a severe discount. Similar deals include 550 California, 350 California, 180 Howard and 60 Spear streets, each of which have sold for between $120 and $260 per square foot.

Strada Investment, founded in 2011, has largely invested in offices. But in the summer of 2022, it handed off a 270,000-square-foot office tower project in San Francisco’s South of Market, after winning approvals at 490 Brannan Street.

The previous May, the firm filed plans to construct a 16-story, 500-unit apartment complex on Bryant Street in South of Market. The $220 million tower is now under construction.

Among its development projects is a new campus for Samuel Merritt University at 520 11th Street in Downtown Oakland and a joint venture with Trammell Crow for a $1.2 billion redevelopment plan for two aging San Francisco piers along the Embarcadero into offices, housing and a floating swimming pool.

— Dana Bartholomew

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