Kylli’s SF Office Building Value Plummets

A new appraisal of one of San Francisco’s biggest distressed buildings puts it at just a quarter of its pre-pandemic value of $589 million, according to servicer comments, which also indicate that the lender may be renewing its workout talks with owner Kylli.

At $153 million, or about $264 per square foot, the new value of 225 Bush Street amounts to less than half of the $350 million loan that Kylli took out in 2019, after buying out minority partner Flynn Properties. Kylli, the Burlingame-based subsidiary of China-based Genzon Investment Group, failed to pay off the commercial mortgage backed security when it matured in November, sending the century-old former Standard Oil headquarters into special servicing.

A few months ago, lender Deutsche Bank looked to be pursuing a sale of the debt on the 580,000-square-foot downtown tower, with servicer notes at the time reporting that there “does not appear to be a viable pathway” for a modification. But more recent servicer comments indicate that, while all options are still on the table, the lender is “working with the Borrower to determine if a modification is a viable option.”

Deutsche declined to comment. Kylli did not immediately reply to a request for comment.

The more “active tone” about working with Kylli in the special servicing notes could be the result of anything from the borrower showing a willingness to add capital to optimism on leasing or overall market sentiment, said Morningstar analyst David Putro. The trend has been toward borrowers walking away from loans, according to distress experts, so banks have typically been open to working with the dwindling number of borrowers who are trying to hold onto their buildings.

“If the borrower shows a willingness to negotiate in good faith, it usually behooves a CMBS servicer to try to work toward a resolution and avoid the expense of foreclosure, owning and managing the property, then marketing it and disposing [of it],” Putro said.

Borrowers have been especially disinterested in a workout if the building is valued at well below the loan amount, like 225 Bush.

At the end of 2024, cash flow at the property fell to $7.1 million, according to servicer comments, compared to $10.3 million in 2023 and $26.3 million when underwritten in 2019 — a 73 percent drop.

“The drop in value is pretty much in lockstep with the drop in cash flow,” Putro said.

The 1922 building was fully occupied with the loan originated in 2019 but was down to 43 percent occupancy at the end of 2024, according to the servicer remarks. An additional 26,000 square feet is available for sublease on the fifth floor, according to a Cushman & Wakefield marketing site for the former General Assembly classroom space.

JLL is the leasing firm for the 22-story office building and its ground-floor retail spaces. It declined to comment on the new valuation or leasing activity at the building.

Low tenancy doesn’t always dissuade bargain-hunting buyers. In April, DivcoWest and Blackstone bought the empty 119 Fremont in the South Financial District for just over $111 million, the biggest downtown sale in the city since the pandemic, and a 70 percent discount over its last trade five years ago.