Valuations of distressed SF offices show losses as high as 84%

The value of some distressed offices in San Francisco have plunged by more than 80 percent, according to private valuations.

The city, which has lost hordes of office workers to remote work, has seen valuations for distressed buildings drop by between 20 percent and 84 percent, the San Francisco Examiner reported, citing an analysis by CoStar. The overall office vacancy rate is a record 37 percent.

The distress has been most acute in sectors reliant on traffic in Downtown, according to Nigel Hughes, senior Bay Area director of market analytics at CoStar.

Hughes conducted a survey of strained commercial mortgage-backed security loans, where the loan servicer asked for an appraisal and found resulting valuations that had fallen precipitously.

“It gives you a feeling as to how much pressure the owners are under, in that because of the way the economy has moved, the value they have in these buildings has been seriously eroded,” Hughes told the Examiner. 

Local office landlords since the pandemic have been beset by burdensome debt obligations and buildings suffering occupancy declines.

Among the hardest hit properties is a 65,700-square-foot building at 340 Bryant Street. The four-story building, built in 1932, has lost $43.8 million, or 84 percent of its former value, according to CoStar.

In dollar terms, Hughes said the largest single decline in appraised value was the San Francisco Centre mall, renamed the Emporium Centre San Francisco, at 865 Market Street. Since 2016, the indoor mall and offices lost $930 million, or 76 percent of its former value.

The 1.45 million-square-foot mall near Union Square was placed into receivership last October after the owners stopped making payments on a $558 million loan tied to the property.

KBRA in July concluded the value of the property covered by the defaulted loan was worth $221.7 million, down from $1.22 billion in 2016.

One Market Plaza, a 1.6 million-square-foot trio of office towers at 1 Market Street in the South Financial District, was valued at $1.25 billion, $510 million less than in 2016, according to CoStar. That’s a 29 percent drop in value.

While the towers have a high occupancy, Google leases 22 percent of its offices and the tech firm said it will not renew next spring.

Greater San Francisco had the third-highest percentage among major markets of distressed loans tied to CMBS loans, with 35 percent of $21.9 billion, KBRA reported this month.

Such debt represents a fraction of all existing commercial loans, but it serves as a proxy for understanding larger commercial real-estate market trends, Patrick Czupryna, a KBRA managing director, told the Examiner.

— Dana Bartholomew

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