San Francisco Retail, Hotel, Office Markets Face Headwinds

Another week, another every-which-way slate of indicators on the broad Bay Area market, where the South Bay’s retail vacancy rate is down, Marriott let go of another hotel in Oakland, office sales earned a dubious distinction in San Francisco, and the ultimate VCer pulled up his stakes in the wealthier-than-thou enclave of Atherton.

The upward tick in retail vacancies in the South Bay put that market–whcih includes parts of Silicon Valley–on the wrong after it got off to a strong start this year.

The South Bay saw a retail vacancy rate of 5.2 percent in the second quarter, an increase from 4.7 percent in the first quarter. At that time, vacancies in the area hit a six-year low. Retail rents dropped from about $2.92 per square foot in the first quarter to $2.81 in the second.

Retail vacancy varied depending on location within the South Bay.

In Sunnyvale and Cupertino, retail vacancy was the lowest at 3.1 percent, according to Cushman & Wakefield’s Q2 report. North San Jose and Milpitas were at 4.5 percent. Palo Alto, Mountain View and Los Altos notched a 5.1 percent vacancy rate, while 5.4 percent of retail spaces in downtown San Jose, south San Jose, Los Gatos and Campbell sat vacant. Santa Clara recorded 5.5 percent retail vacancy, and Morgan Hill and Gilroy took the crown at 7.5 percent.

Investors don’t seem to be too worried about the long-term outlook for the South Bay, though, a reminder that the local retail market is about on par with the national average.

In December, Arc Capital Partners and Milan Capital Management bought The Plant shopping center in San Jose for $95 million. In the subsequent months, several new leases were signed and a supermarket and discount store moved into spaces that had been empty. Other retail centers have also been finding tenants for previously vacant spaces, such as Hobby Lobby moving into a 62,000-square-foot former Bed Bath & Beyond and Sports Basement setting up camp in an 86,000-square-foot former Barnes & Noble at Almaden Plaza in San Jose.

SF remains bargain basement on office deals

When it comes to office buildings selling below their original purchase prices, San Francisco is running near the front of the pack.

The city is second only to Houston in office properties that have sold for less than their previous sale prices over the past two years. In total, 67 percent of office properties in San Francisco have traded hands at discounted prices, per Yardi data. The national average for offices selling for less than what they were previously bought for is 42 percent.

As it stands, San Francisco has the highest office vacancy rate in the nation; Avison Young pins total direct vacancy for offices in the city at 27.8 percent last quarter.

Hotel hell in East Bay

Add another hotel in Oakland to the long list of lodging woes in the Bay Area.

Marriott International’s Moxy Oakland Uptown hotel is in default on a $35 million loan it acquired in 2022 from Acore Capital Mortgage. The 172-room downtown Oakland property, developed by Tidewater Capital and Graves Hospitality, opened the year prior, at the time joining several new hotel developments across the Bay Area. Now, it’s joined a less desirable — and quickly growing — list.

Last month, The 500-room Oakland Marriott City Center in downtown Oakland was seized last month in a foreclosure that placed its value at $70.2 million — over 50 percent less than its previous sale price of $143 million in 2017. The 142-room Hyatt House Pleasant Hill was foreclosed in June.

In May, lenders seized the 541-room Signia by Hilton hotel in downtown San Jose in a foreclosure on a $134 million loan for the building. That same month, the 128-room Hyatt House Pleasanton was also seized in a foreclosure. In April, a lender took back the 276-room dual-branded Residence Inn and AC Hotel in downtown Oakland in a streamlined foreclosure process. In Berkeley, Kubera Hotel Properties defaulted on its loan for the 113-room University Inn & Suites, sending it to a foreclosure auction. A Motel 6 in San Jose and Super 8 locations in San Jose and Livermore are also facing loan defaults.

Andreessen abandons Atherton

Tech pioneer and venture capital giant Marc Andreessen has had enough of Atherton.

The AH Capital Management co-founder has sold his 12,000-square-foot estate in the tony Peninsula town, home to the country’s priciest ZIP code, to an unnamed buyer for $27.2 million, or $2,266 per square foot. The home was originally listed for more than $33 million last year.

Andreessen bought the home in 2007 for $16.6 million. The main house features amenities including two kitchens and seven fireplaces. There’s also a one-bedroom guest house, a detached studio and a four-car garage partially converted into an office space on the property. While guests can enjoy a reflecting pool, fountains and a pergola, there’s no swimming pool or sports court on site.

The VC titan spent more than $250 million on three properties in Malibu in 2021 and 2022. Andreessen, joined by a chorus of Atherton residents including basketball power couple Steph and Ayesha Curry, spoke against the town’s plan to add density at that time.

Andreessen’s Atherton home sale price represents about half of the year’s priciest sale in the Peninsula town, a record held by Seagate CEO Stephen Luczo, who sold a property in April for $51.5 million.

Seligman slashes Forge’s office-to-resi plans

Forge Development Partners won’t be getting its wish to turn offices at the Humboldt Bank Building into housing.

The Seligman Group, which owns the 785 Market Street building, is instead going to lease the 19-story, 90,600-square-foot building as offices, bucking Forge’s plan for 124 units at the property — at least for now.

Forge agreed earlier this month to terminate its exclusive right to pursue an office-to-residential conversion at the site after failing to secure enough financing to buy an equity stake in the building. The idea isn’t off the table entirely, though.

“Although the city has made extraordinary progress in trying to support conversions of existing buildings to housing, the equity markets for this remain challenging, resulting in delays in the process,” Forge CEO Richard Hannum told the San Francisco Business Times. “We expect to continue and eventually make this conversion work. But in the interim, the building needs to proceed.”