SF Office Real Estate Gets Smacked: $300 Million Office Tower for Sale at 80% Off

The state of San Francisco’s commercial real estate market has reached a critical point, as evidenced by the significant drop in the value of the 22-storey tower at 350 California Street. 

Valued at around $300 million in 2019, the building is now expected to sell for just $60 million, an 80% drop in just four years. This situation reflects the struggles faced by the city’s office real estate market, which has been severely impacted by the pandemic-induced remote work trend.

San Francisco in particular has been hit hard due to its high costs, its reliance on the tech industry, which has quickly transitioned to hybrid work, and quality-of-life issues like crime and homelessness. This has led to a significant increase in vacant office space, which now stands at almost 30% in the city, more than seven times the rate before the pandemic.

Since there is no one going to the office, the financial district’s restaurants, shops, and other small and independent businesses are forced to slash jobs or shutter completely.

It gets worse according to The Wall Street Journal, citing figures from data company Trepp Inc, around $80 billion worth of loans backed by US office real estate will be due this year, and most of these loans will need to be refinanced at the worst possible time of soaring interest rates and low occupancy.

The publication also cited data from Wells Fargo & Co that showed that the dollar value of office-building-backed loans considered “nonaccrual,” wherein banks no longer expect full interest and principal payment, ballooned 290% from $186 million in the last quarter of 2022 to $725 million in the first quarter of this year.

As for the 22-storey tower, around 75% of the building is vacant. Its owner and primary tenant, Union Bank, has been steadily vacating the building. When it was first listed for sale in 2020, the bank thought it could get at least $250 million for it, after all, it was worth $50 million before the pandemic. The bank also had plans to lease back 50,000 square feet on a 10-year term. 

The building, built in the 1970s and first owned by Mitsubishi UFJ Financial Group’s MUFG Americas unit, will also need some sprucing up to compete with its more up-to-date neighbors which have made rooftop decks and fitness centers the standard for high quality spaces. 

The sale of 350 California, which is being handled by CBRE (NYSE: CBRE) could be an important indicator of the health of the office real estate market nationally. 

“This could be seen as a bellwether for the value destruction in the urban office market nationally,” warns Mark Fawer, a partner in the real estate practice group at law firm Greenspoon Marder, “especially those markets that are more technology and financial services-centric.”

Information for this story was found via The Wall Street Journal, San Francisco Business Times, and the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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