Top-Floor Offices Seek Tenants at 505 Montgomery

Class A offices with a view have emerged as one of the few bright spots in San Francisco’s commercial market, with lower vacancies and higher rents than the rest of the downtown core.

But the empty four floors at the top of 505 Montgomery Street — famous for its Empire-State-Building-like spire and lavish Art Deco-inspired lobby — show that listing agents for even trophy offices with bay and bridge views need to jump through hoops to land a long-term tenant.

“We’ll accommodate whatever the tenant needs,” said Colliers listing agent Scott Harper. “We’ll spend as much TI as needed for the right tenant at the right use.”

Tenant improvements and free rent are two of the biggest bargaining chips Harper has to offer, he said, as the ownership is holding strong on annual asking rents in the mid to low $90s per square foot for these upper view floors. The 1988 building has been owned by a REIT connected to Deutsche Bank’s DWS spinoff since 2005 and there is no debt on the property, according to Harper, which means that the owners can be “more selective” about picking “the right tenant, not just any tenant.”

Colliers data show that TI and free rent are on the rise across the Financial District and SoMa, with both about twice as high as they were in the first quarter of 2020.

Deal incentives like higher commissions, gifts and free trips for tenants’ agents are coming soon, Harper added, and are not unique in the current marketplace.

Tenants at top

The Class A building, which attracts professional services companies as well as law firms like anchor tenant Latham & Watkins, lost its two long-time tenants on the top floors of the 24-story building last year, according to Harper. Private equity fund Horsley Bridge Partners took up the 21st and 22nd floors, but downsized into one floor at 140 New Montgomery when the lease was up. Resmed, a medical device business, had asked for an early termination of its lease on the 23rd floor and the ownership agreed. The 24th floor had long been empty in part because there is a dedicated elevator connecting it to the 23rd floor and nobody wanted to rent it with an existing tenant below, Harper said.

In the current market, the 23rd and 24th floors are offered together, for a combined nearly 15,000 square feet, with a discount for the 24th floor because some of its views and layout possibilities are impacted by machinery on top of the building. The 21st and 22nd floors are each being leased separately and have 11,000 and 10,000 square feet, respectively. Harper has done about a dozen tours and so far no one has been interested in renting them together.

“If you want 20,000 square feet, you want them on one floor,” he said. “That’s how we lost Horsley.”

Lower berths

These are not the only empty floors in the North Financial District building. The biggest space to fill are the second and third floors, which combined have more than 30,000 square feet. The eighth and ninth floors are also vacant, as is the fifth floor which has been built out as a spec suite with a “modern, exposed ceiling,” according to the listing notes. Each of these 15,000-square-foot floors are being marketed separately, though Harper said the ownership is looking at breaking some down into smaller suites, since that seems to be where the building would get the most traction.

“We’re getting good activity on under 5,000 square feet on the lower floors,” Harper said, where annual asking rents are in the low 70s per square foot.

National law firm Berger Montague recently opened its first San Francisco office in about 3,000 square feet on the sixth floor of the building. In a bigger deal, ATEL Capital “moved over from the Pyramid,” Harper said, trading 20,000 square feet on the ninth floor there for 15,000 on the seventh floor at 505 Montgomery.

Two additional suites on the sixth floor will become vacant in July, but the tower has also had some success at maintaining its current roster, most importantly global law firm Latham & Watkins, which occupies 10 floors. Regus sits on the 10th and 11th floors and renewed a long-term lease two years ago, Harper said, adding that the co-working space has been filling up again after a huge drop in activity at the start of the pandemic. Private wealth managers Whittier Trust renewed and expanded to most of the 12th floor recently, and the ownership has put in another spec suite to attract a tenant to the 1,800 square feet left over.

Further investments in the building include a ground-floor remodel with a fitness center, bike parking, and a cafe and wine bar coming this fall — yet another example of a downtown building adding street-level amenities to bring in both tenants and foot traffic.

But it’s a building’s top floors with views that command the highest rents in the post-pandemic office market.

Between 2019 and the end of last year, the annual average effective rent for prime view space lease transactions increased by 9.5 percent to $112.24 a square foot, according to CBRE. At the same time, Class A effective rents overall fell by nearly 5 percent. Vacancy in view buildings was also tighter at 9 percent in the last quarter of 2022, compared to more than 20 percent for all Class A buildings downtown.

At 505 Montgomery, the smaller, lower floor suites may be moving first, but Harper said he’s buoyed by the hope that what starts at the bottom may work its way up to the top.

“I’m encouraged to see smaller tenants starting to get back in the market,” he said. “They won’t need the same size, but just being willing to take space again is a good sign.”