SF poised to buy 1.1M sf office tower in Mid-Market for as low as $200 psf

The city of San Francisco has cut a deal to buy a 1.1 million-square-foot office tower in Mid-Market for no less than $200 per square foot. But can the city afford it?

The city’s Board of Supervisors voted to add 225,800 square feet of offices to its lease at the 22-story building at 1455 Market Street, bringing its footprint to 400,000 square feet, the San Francisco Chronicle reported.

The deal unlocks an option the city had previously negotiated with Los Angeles-based landlord Hudson Pacific Properties to buy the tower for no less than $200 per square foot by 2027.

Should the parties fail to close the deal, Hudson Pacific has agreed to lease offices in the building to the city for a discount over the next two decades.

Terms of the deal appear favorable to the city, according to the newspaper. San Francisco has agreed to a rental rate of $41.20 per square foot, which increases at 3 percent a year, while the city won’t have to cover operating expenses until 2028.

At the same time, Hudson Pacific will provide more than $25 million in total tenant allowances, including almost $3 million to cover moving costs.

The move will spur a continued effort by San Francisco to consolidate city divisions that now occupy aging leased or city-owned properties under one roof, including its Human Services Agency and the IT unit of the San Francisco Library.

The building previously served as the headquarters for Uber and Block, formerly Square.

But to buy the tower, the city would need to budget for at least $220 million — or more if market conditions improve.

That might be burdensome, considering Mayor Daniel Lurie is struggling to close a projected $818 million deficit over the next two years by June 1. Another $1 billion could be at risk because of potential federal funding cuts, his office said.

It’s not clear how much the city would save by buying the building, while cutting costs for its other buildings.

Hudson Pacific, which has seen the value of its commercial portfolio plunge, has been working to sell many of its buildings in San Francisco, where office vacancy stands at 35.8 percent, according to CBRE.

Mid-Market, once a burgeoning tech hub because of a 2011 “Twitter tax break,” which erased a 1.5 percent payroll tax, has hit hard times. A block away from 1455 Market, a two-building headquarters complex for X, formerly Twitter, sits empty, according to the Chronicle.

Hudson Pacific’s tower at 1455 Market tower had its value drop by 80 percent after Uber and Block pulled up stakes. And a vacant 16-story office tower up the street at 995 Market sold last year for a 90 percent discount.

— Dana Bartholomew