Who’s afraid of San Francisco office?
Local buyers are setting a new floor for the market at prices 75% off their previous values
Amid the headlines about “doom loops” and record high vacancy, Peninsula Land & Capital bought its first San Francisco office building this fall.
The Palo Alto-based private equity commercial real estate investment fund paid just over $40 million for 550 California Street, a 13-story tower in the North Financial District.
“Market-clearing prices are being established in San Francisco,” its CEO and founder, Roger Fields, announced on X, formerly Twitter, a day before the closing.
The price is a 60% discount from what Wells Fargo paid in 2005 — and a mere $120 per square foot.
“550 has the highest chance to be the sale that we all look back to as the lowest price-per-square-foot deal in the FiDi,” said a source with knowledge of the market.
The deal is one of a handful made by local investors confident that the city’s comeback is inevitable and hoping to get in at the bottom. San Francisco has been a city of highs and lows since its Gold Rush days, and the last three years have definitely been a low. With one in three offices vacant and interest rates more than doubled over the last year, owners are walking away from their buildings or selling at huge discounts because they can’t or don’t want to wait out the down cycle.
“The local knowledge is just being here, walking down the street and saying, ‘Hey, this feels pretty good,’” said Connor Kidd, CEO of the Swig Company, which helped set the new floor with its recent purchase of 350 California Street. “And not just reading the headlines and saying, ‘I don’t want to go to San Francisco.’”
Making a Splash
When San Francisco shut down in March 2020, office occupancy was hovering around 93%, according to Transwestern. Class A rents were nearly $85 per square foot, and Class Bs were $65.
Class A rents have now dropped to $65 per square foot and around $50 for Class B, according to Colliers, with record-high concessions in free rent and tenant improvement allowances.
Yet demand has picked up, especially from tech firms. Artificial intelligence-related companies signed three of the five biggest leases in the third quarter of this year, according to market reports.
“Somebody has to do the cannonball jump into the pool first,” said Derek Daniels, Bay Area research director for Colliers. “Although this market is challenged, it’s also creating a massive amount of opportunity.”
Mitsubishi UFJ Financial Group, based in Tokyo, started shopping its 300,000-square-foot 22-story tower at 350 California Street in the spring of 2020 for $250 million. UFJ had an ownership interest in the building since the 1990s, when it bought Union Bank, the sole tenant.
Last year, UFJ sold Union Bank to U.S. Bancorp and mostly moved out. Now 75% empty, the building sold in August at about 75% off the 2020 asking price, $250 per square foot.
The buyers were SKS Real Estate Partners and Swig.
“I think when we look back we’ll say this was an amazing time to buy office buildings in San Francisco,” said Swig CEO Kidd.
Kidd said his firm put in an offer on 350 California and was disappointed that it wasn’t selected for the final round.
Then the Swig team heard that SKS’ financial partner was “not as solid as they thought.”
When former Swig CEO Jim Carbone ran into SKS managing partner Paul Stein, the deal came together, in part because of the relationship between the two San Francisco companies, Kidd said.
Kidd believes it could take upwards of 10 years to make a comeback, but he has no doubt that between the beauty of the city, nearby institutions like Stanford and UC Berkeley and San Francisco’s “unique ecosystem of entrepreneurship,” the city will rise again.
“Not only are we believers in San Francisco, but we can be patient,” he said.
The market talks
Just a few blocks away from 350 California, 60 Spear Street in the South Financial District also changed hands from an out-of-town seller to a local buyer at an enormous discount. New York-based Clarion Partners sold the building for just under $41 million — or about $250 per square foot — to San Francisco-based Presidio Bay Ventures this summer.
Clarion bought the 11-story, nearly 160,000-square-foot tower for $107 million in 2014.
Today, it’s only 30% occupied and is expected to be vacant by the summer of 2025.
There were about a dozen other potential buyers, mostly local, according to Presidio Bay founder and CEO Cyrus Sanandaji.
The interest is a “testament to the bones of the building,” which has three sides of windows and clear ceiling heights on every floor, he said. At the time, few office deals of this size had closed since the pandemic, but Sanandaji said the firm still knew where it had to come in to be competitive without overpaying.
“Everyone is aware, generally, of where the market is even if comps haven’t posted,” he said. “The market talks.”
Sanandaji said he doesn’t believe Presidio Bay had the highest bid on the property, but it did offer firm financial backing from a family office and a quick time frame for closing.
“From the moment we walked in, we said this is the one that we’re going to buy,” Sanandaji said, citing the building’s “micro-location” near the Ferry Building and ability to be completely repositioned with amenities like a wellness center and 1,000-person presentation space.
Spreading the news
Now that the first few post-pandemic sales have closed, and a new floor set, will other buyers from outside the city jump into the pool?
Opportunistic institutional funds are looking at deals, but “I think it’s too early for them to start writing checks,” Sanandaji said. He expects to see outside investment ramp up by 2025.
The recent short-sale offering of 115 Sansome Street, for one, received interest from local, national and international buyers, including institutions and high-net-worth individuals, according to a source close to the listing.
Just 50% leased, the 14-story Beaux Arts building received over 20 offers and was likely to sell for $275 per square foot, Peninsula Land & Capital’s Fields posted on X. “There is significant interest in acquiring well-priced San Francisco office buildings,” he wrote.
Local enthusiasm gives a clue to how the market could recover.
“The more it’s like, ‘Oh, clearly the people closest to this are seeing something, maybe we should start to get smart on this,’ or maybe by then the newspapers have started writing about it and it’s like, ‘Oh, San Francisco is on the upswing, we should get in on the action,’” Sanandaji said.
“That’s why it’s a boom-bust town.”