550 California St. San Francisco was listed for sale, but offers were much lower than expected.
For the past two years commercial real estate observers have wondered what the pandemic, and the work-from-home revolution it unleashed, would do to property values in San Francisco’s financial district.
Now there’s at least an early inkling of an answer — and it is not pretty.
Two downtown San Francisco office buildings that were put up for sale last spring have been yanked from the market after bids came in far below the sellers’ most pessimistic projections, according to commercial real estate brokers familiar with the deals.
In June, Wells Fargo, San Francisco’s second largest private employer, listed its 13-story building at 550 California St. for $160 million, about $450 a square foot. While the guidance price was a good 25% below what the 355,000 square-foot building would have fetched before the pandemic, the bids submitted were much lower — about $250 a square foot, which is about 45% below expectations. That’s 70% below likely 2019 values.
Wells Fargo declined to comment.
Meanwhile, a few blocks away, on the south side of Market Street, UBS Realty Investors sought a buyer for 455 Market St., a 374,000 square-foot complex that is 80% leased. While the seller sought close to $280 million, or $750 a square foot — pre-pandemic values would have been $900 a square foot — bids received were closer to $500 a square foot, about $187 million.
Ken Rosen, chairman of the Berkeley Haas Fisher Center for Real Estate and Urban Economics, said the two broken deals are an indication that “San Francisco has a very big problem.”
“At the moment San Francisco is not a market investors want to be in,” said Rosen. “People are not feeling good about buying San Francisco office buildings.”
455 Market St. in San Francisco was listed for sale, but offers for the commercial property were much lower than expected.
While San Francisco’s residential rents have bounced off of pandemic lows, the office sector is struggling with 24% vacancy rate, according to the brokerage CBRE. Rents have declined from $83 a square foot pre-pandemic to $75 a square foot today.
Colin Yasukochi, research director at CBRE, said there are too many uncertainties to make investors comfortable with committing to transactions.
“Price discovery is still in the early stages, in terms of where rents may be headed and where office occupancy is headed,” said Yasukochi. “As long as those two important variables are unknown it’s going to be hard for investors to establish value, and if forced to, most buyers will undervalue an asset.”
The office building sales market is stuck in a bit of a pickle: Buyers and sellers are unable to come to terms because of a lack of solid comps, but there will not be reliable comps until a few properties are sold, according to attorney Tony Natsis, chair of Allen Matkins’ Global Real Estate Group.
“We don’t have a dip, we have a complete standstill,” said Natsis, who represents some of the biggest office landlords and developers in California. “There is a classic disconnect between buyers and sellers about what those buildings are worth. The problem is that there are not enough data points to force the buyer or the seller to admit their number is wrong.”
Natsis said he expects the picture to become clearer this fall as more companies settle on work-from-home policies.
“All it’s going to take is the stock market stabilizing, inflation to stabilize and companies to mean it when they say ‘You’ve got to come back to work,’ ” he said. “Even if you don’t like the answers you can then price an asset.”
J.D. Lumpkin, executive managing director with Cushman & Wakefield, said perspective buyers of the 550 California building saw it as a “complete gut.” He compared it to 680 Folsom Street, a former phone company building that TMG Partners completely redeveloped during the Great Recession, adding a new glass curtainwall exterior and all new systems and interiors. But while that building was quickly leased out to Macys and Riverbed Technology in 2012, tenant demand today is less of a sure thing.
“It takes a lot of courage to do something like that,” said Lumpkin. “And as of now there is not a solid demand thesis — you can’t look at a deal and say, ‘I have a pretty good idea of who is going to lease that.’ ”
Lumpkin said several investors looked at the Wells Fargo building as a residential development site, but the mid-block location — hemmed in by office buildings on both sides — make that a challenge as well. In the end, offers in the $200 per square foot were similar to what an investor would pay per buildable square foot for land prior to the pandemic.
“Basically, (bidders) were attributing no value whatsoever to the structure itself,” he said.
The decline in the value of downtown office buildings will have long-term implications for the city’s tax base, as building owners petition for reassessments. A recent Chronicle analysis found that sales tax revenues in District Six — which includes Financial District, Oracle Park and SFMOMA down to Mission Bay — have declined from $28.3 million in 2019 to $17 million in 2021.
Already property owners have started petitioning the assessment appeals board to have their property values adjusted downward. The owner of 301 Battery St. is looking to have its assessment adjusted from $154 million to $101 million. That cases, along with eight others, will be heard in September. The owners of 222 Second St., currently assessed at $535 million, had filed an appeal arguing that the tower is worth $267 million. That appeal has been withdrawn, according to building owner Tishman Speyer.
Beyond the work from home trend sending less people into office spaces, the city’s central business district is suffering from a lack of conventions, empty storefronts, homeless encampments and open air drug dealing, Rosen said. He said the city’s budget would likely take a major hit as more and more property owners have their assessments lowered to reflect the new realities.
“It will be a wake-up call,” he said. “We are losing our economic base and that will continue until we change our politics in San Francisco. We have a crisis in business confidence.”
J.K. Dineen is a San Francisco Chronicle staff writer. Email:
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Twitter: @sfjkdineen
J.K. Dineen covers housing and real estate development. He joined The Chronicle in 2014 covering San Francisco land use politics for the City Hall team. He has since expanded his focus to explore housing and development issues throughout Northern California. He is the author of two books: “Here Tomorrow” (Heyday, 2013) and “High Spirits” (Heyday, 2015).
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