A New Era of San Francisco Commercial Real Estate Begins in 2024

Between significant tech layoffs and continuing economic headwinds, it was fitting that one of the last major commercial real estate moves of the year in San Francisco was an office building being listed for sale at a massive discount. 

The 20-story office tower at 33 New Montgomery St. is being listed at $80 million, a 46% haircut from the $146 million it traded hands for in 2014. 

That big drop in valuation—first reported by the San Francisco Chronicle— mirrors larger trends at office properties across San Francisco and the Bay Area, where high vacancy rates and the rising cost of lending have put many owners in a bind and spurred some to cut their losses and offload troubled properties.

An increasing number of those who made investments before the pandemic are now coming out on the losing end heading into 2024. It’s not all bad news. Investors did get a little reprieve heading into the holiday break, with the Federal Reserve signaling it was finally prepared to start lowering interest rates after the new year, thus making money easier to borrow. 

But interest rates and office occupancy rates won’t flip overnight. What’s more likely is that 2024 will represent a turning-of-the-page moment in San Francisco, a real estate reset where past expectations are no longer palatable, and well-positioned players enter the game buying low.  

Similar to 33 New Montgomery, a 210,000-square-foot office building at 600 Townsend West was listed for sale last month by real estate services firm JLL. The building has been owned by Japanese investor Toda Corp. for over 30 years, and the firm is seeking roughly $74 million for the property roughly a mile southwest of Oracle Park.

While Toda does not appear to be under significant pressure from lenders or facing a lack of cash flow because of low occupancy (JLL’s listing says it is 92% leased)—its price guidance of roughly $350 per square foot does fall in line with a neighboring building recently sold back to one of its original owners at a major discount. 

A source with knowledge of the deal said the initial round of bids for the property topped out around $67 million. 

Less than two blocks away from Toda Corp.’s property, a different story with a similar outcome is playing out at 410 Townsend St. 

There, the building’s previous owner, Clarion Partners, fell behind on a roughly $40 million loan it took out in 2019, the same year it purchased the 76,000 square-foot office for $86 million. For a point of comparison to current market values, that works out to roughly $1,130 per square foot. 

According to public records, Clarion handed the property back to its lender this month. Before its value plummeted, the building was home to the likes of TechCrunch, Eventbrite, Zendesk and Adobe. A recent online listing showed that three out of the four floors are available for lease. 

Vacancies have also crippled the owners of a historic 16-story building at 995 Market St., just down the street from San Francisco’s new Ikea. According to public records, Bridgeton Holdings has defaulted on a $45 million loan. The departure of WeWork in 2021 left the 90,000-square-foot building more than 80% vacant. 

Rock-bottom pricing and increasing distress mean that property owners are finally starting to pull the trigger on deals, in a sign of activity likely to ramp up in the year ahead.  

For example, at 55 New Montgomery St., the property’s lender actually purchased the building, which had similarly slipped into default in a foreclosure auction. CrossHarbor Capital Partners secured the 100,000-square-foot building for just $15 million, according to public records— a fraction of the $71.4 million loan it issued to the previous owners in 2018.

Falling property values have prompted other parties just last week to settle with lenders for a reduced price instead of the costly and time-consuming foreclosure process. 

At the three-building North Park office complex at 560 Davis St., the property’s previous owner, Gaw Capital, swooped in and purchased the existing debt on the building for half-off. Additionally, the new owners saved on transfer tax because the property was handed over in a process known as a “deed in lieu of foreclosure,” according to public records. 

Then, there is the interesting case of 115 Sansome St., where the Vanbarton Group won a competitive bid on a building it already owned. The owners reportedly closed an all-cash deal for around $35 million, which is less than the $54 million loan it took from Bank of America in 2016, according to public records. 

In doing so, Vanbarton paid off its debt at a price more reflective of the building’s current value. 

Local buyers and prospective tenants see the writing on the wall—and to some it spells opportunity.

“Right now, we know we have the best value in town,” said Roger Fields, principal of Peninsula Land & Capital. 

In September, Fields purchased his first building in San Francisco, an entirely vacant office tower at 550 California St. At $40.5 million, the property went for less than half the price the previous owner paid 18 years ago. 

Fields, alongside a handful of other opportunistic investors, have acquired various buildings in the city at heavily discounted prices over the past year. Since these buyers are not encumbered with the same debt of the previous owners, landlords like Fields can offer lower rents or invest the dollars they saved back into upgrading their properties. 

The 13-story building that he bought was once owned and fully occupied by Wells Fargo. Fields wasted no time listing the floors for lease after closing on the purchase. 

As of December, he said that his firm is already finalizing a lease with a new tenant, but declined to name them, although he noted the building lends itself to a broad variety of uses. 

“To pay that price for a building in great shape, in a location like that, is just unheard of,” Fields said.

But that advantage still runs up against the reality of hybrid office work being here to stay. According to Raise Commercial Real Estate, which brokered the 476,000 square-feet OpenAI lease in October, office leasing activity fell by 33% in 2023 compared to the year prior. 

Yet Fields is undeterred. 

He said based on conversations with prospective tenants, he believes the work-from-home pendulum will swing back the other way. 

“San Francisco has its problems, but it is too beautiful and valuable for those not to be solved eventually,” Fields said. “The Financial District is often lumped in with the other areas of the city with severe issues when it really shouldn’t.”