EBay-Leased Building in San Jose Enters Special Servicing

The loan for an office building in San Jose exclusively leased to eBay has entered special servicing, according to Chicago-based Morningstar.

The building was purchased in 2018 for $132.5 million by Southern California-based Ocean West Capital Partners and an affiliate of South Korea-based Hana Asset Management.

When the two investment firms acquired eBay North First Commons, they took out an $88 million loan from Germany-based Deutsche Bank. They have $51 million left on the loan, according to Morningstar.

The loan was transferred to special servicing in March ahead of its June maturity.

While the 541,000-square-foot building is still completely leased to eBay, the company vacated the premises in 2020 to relocate to its headquarters in Willow Glen. The e-commerce company has paid the rent since its exodus. With the mature date approaching, “it’d be impossible to get refinancing” for a dark building, thus the move to special servicing, according to David Putro, head of CRE analytics at Morningstar.

Ebay’s lease extends to 2029, but the tenant has a termination option in March 2026, with 12 months notice and upon payment of a $12 million termination fee. Typically companies cannot cease paying rent unless they go bankrupt or reject the lease through the bankruptcy court, so eBay “had no choice” but to keep paying years after vacating the property. Putro said he assumes that eBay has been looking for a sublease partner, which illustrates a major red flag in the market.

“Our biggest concern is reflected in this loan: lots of sublease space,” he said. “There have been published reports of Meta and LinkedIn putting a lot of sublease space on the market — this typically forces landlords to offer enticements to lure in tenants, which typically means lower effective rents.”

First North Commons is located at 2515, 2525, 2535 and 2545 North First Street in the Golden Triangle Area of San Jose. It’s in the northern part of the city and has been historically known as a hotbed for tech companies. However, recent downsizing by tech companies has resulted in a weaker market with larger impacts on the horizon.

“Silicon Valley has a lot of big investment-grade tenants that have decided to downsize/vacate but are on the hook for long leases (usually 10 years),” Sarah Helwig from Morningstar said. “Tenants can try to sublease their spaces, but in this market, there isn’t a lot of demand. I think it’s going to be a slow burn for the market as leases roll over the next couple of years.”