Lenders track San Francisco office sales for directional signals  

Lenders and investors believe some markets have started to hit bottom as trades come through. 

The sale last month of San Francisco’s 123 Townsend Street is the first of a series of pending office sales that could mark the bottom of the market – and provide long-awaited clarity on pricing and valuations for lenders and investors. 

Rubicon Point Partners, a local investor, acquired the property from a CBRE Global Investors fund for around $73 million. The purchase price was about half of what the Los Angeles-based firm paid in 2021 and provides an important signal to the market, according to Manus Clancy, a senior managing director at New York-based data provider Trepp. 

“Three or four property sales in San Francisco seem to be getting done at similar levels in terms of price per square foot and discount to previous value,” Clancy says. “These types of sales usually indicate that a bottom has formed, and transactions can start to take place.” 

The trend can be applied more broadly, he believes. “We’ve seen some office property sales mostly in markets that have now hit bottom. [But other] markets and MSA cities tend to progress at different paces.”   

Getting deals done 

Tony Natsis, chair of the global real estate group at California-based law firm Allen Matkins, tells Real Estate Capital USA he has observed a variety of structures for these sales. 

One prevalent transaction model fueling sales is a deed in lieu of foreclosure, a strategy in which a buyer will purchase the loan on the property at a discount and become the new owner. “When the lender is reluctant to foreclose on the loan and take the asset back, they would go to their borrower and make a deal with them to sell,” Natsis says.  

Using deeds in lieu of foreclosure is a lesson learned from previous real estate cycles, including the global financial crisis, he adds. 

Rubicon Point took a different tack with its acquisition of 123 Townsend Street. The firm was able to obtain seller financing from CBRE IM, according to Ani Vartanian, managing partner at Rubicon Point.

San Francisco market 

Despite the negative headlines, Rubicon Point’s acquisition of 123 Townsend is also a bet on San Francisco. “We do think that San Francisco will return,” Vartanian says. “I think it’s going to be a challenging, messy, bumpy period in the short term. But in the long term, we are believers in the resiliency of the city.”  

Rubicon Point managing partner Razmig Boladian says the property has a location of growth potential. “Across the river, there’s the new development where Visa is moving in. You’ve also got Open AI that just signed the lease on the Uber space down the road from there.”  

Boladian also anticipates this cluster effect will promote a faster recovery in a neighborhood with retail and nearby transportation.  

Though San Francisco’s office sector faces challenges including low vacancy rate and declining valuations, some Class A office properties continue to see strong fundamentals, with leasing rates rising, Natsis notes.  

“Tenants are willing to pay more to move to a better office for a better working environment,” he adds, citing properties like Embarcadero Center, 101 California Street and One Market Street. All of these properties have benefited from rising rental rates.  

Based on research by Statista, rent per square foot in the San Francisco office market was tracked at around $79, only second to Manhattan office pricing at $80.9 in the second quarter of 2023.  

New trends in the economy, including the growth of AI, can also become a driver for the recovery of San Francisco’s office market, and Natsis predicts the return of professional firms and tech-oriented firms will drive more people back into the office space in the city next year. 

Outlook 

The consensus is that more transactions will take place in markets where prices have hit bottom, but the velocity of these transactions will depend on specific submarkets and deals.

Larry Taylor, founder of Los Angeles-based sponsor and manager Christina, says there is still a standstill between sellers and buyers in most property sale markets. “No owner of great real estate is interested in selling in a market where the market is not positive. No buyer is interested in buying real estate unless they can get it at a price that makes sense for a yield in today’s market.” 

Taylor notes that the lower availability of capital affects transactions on properties on a macro level, but on a micro level, “if a seller has a great property [to sell] and a buyer wants to buy, that gap closes quite quickly.

“Generally speaking, most real estate in the US is un-investable. Looking for investable real estate is challenging for most, and those opportunities aren’t often very available.”