Oakland’s City Square Goes to Special Servicing

A cluster of retail and office buildings near Oakland’s 12th Street BART station has gone into special servicing, according to Trepp.

Petaluma based-STG Group is the property owner of Oakland’s City Square, and it took out a $90 million loan to refinance the 250,000-square-foot portfolio five years ago. The portfolio includes 500 12th Street; 499, 501 and 525 14th Street; and 1200 Clay Street. The loan is split across two CMBS deals, both for $45 million. They were set to mature in 2028.

The loan and property were placed on a watch list after the lender, Ladder Capital, was concerned about the properties’ finances in the Summer of 2021 after STG failed to meet certain financial prerequisites for keeping the loan in good standing.

Oakland’s City Square has seen years of declines in occupancy and revenue.

Like many other properties, the pandemic halted foot traffic and office activity and negativity affected the square’s finances. The property’s revenue has declined some 20 percent over the last five years as a result of its waning tenancy, even as operating costs have remained the same or higher. Occupancy dropped from 94 percent in 2019 to 63 percent in September 2022. Last summer City Square’s second-largest tenant vacated the property, which leased 14 percent of the square footage.

STG has owned 1200 Clay Street since the early 1990s, according to property records. It purchased the 12th and 14th Street properties for $62 million in 2014.

STG isn’t the only landlord feeling the sting of a down market. Oakland’s central business district has a vacancy rate of 29 percent and an availability rate of 32 percent, according to a first-quarter report by CBRE.

“Office employers have been slow to implement return-to-office policies and this dynamic continues to be one of the largest impediments in the resurgence of the office market as space utilization remains below pandemic levels,” the report said.

Asking rents have begun to fall for the first time in years, due to property owners wanting to lure tenants back to the city. However, with rising interest rates, landlords might ot be able to meet their debt obligations with lower rates and more properties could fall into special servicing.