California Street, one of San Francisco’s major east-west thoroughfares, cuts through the heart of Downtown and previously contained some of the most exclusive—and expensive—commercial real estate in the country.
But troubles in the city’s commercial real estate market, marked by a huge and seemingly permanent drop in occupancy due to remote work, are beginning to hit building values.
Commercial mortgage-backed securities (CMBS) loan delinquencies, considered a sign of distress in the market and a sign of building owners’ inability to pay back their mortgages, are expected to more than double by the end of the year, according to a report from Fitch Ratings.
Here's a look at office buildings along the famed street on sale or in distress.
Commercial real estate observers have a close eye on the Union Bank Building at 350 California St. as a benchmark for property values in the post-pandemic era. Back in 2019, brokers valued the property at around $300 million.
In 2020, when the building went on sale, the number was pegged at around $250 million. As best and final offers are coming, however, commercial real estate brokers say the building is likely to sell at just $60 million—a drop of 80% compared with its 2019 price.
Although it was somewhat of a generic Class B office building built in the 1970s, the property was characterized by nice views and relatively modern amenities. In 2019, San Francisco’s commercial real estate market was riding high on a decade-plus long run of tech growth and low borrowing costs.
All that changed with the pandemic. According to a listing on LoopNet, the property is currently only 32% leased, with the majority of those leases expiring within the next 18 months.
Another building just two blocks away could be one of the next dominos to fall. The 13-story Wells Fargo-owned building at 550 California originally came to market in 2022 at a price of $160 million, around $450 per square foot.
But after receiving what it believed were unsatisfactory offers, Wells Fargo pulled the building from the market a few months later.
However, in a recognition of the changing market conditions, the property is now back on sale at an asking price of around $150 per square foot. Best offers are likely to come in around $100 per square foot, sources say, equivalent to around $35 million. It’s unknown if the seller is likely to accept that new price.
“It’s a tough space, it’s a tough location and who’s the end user?” said one commercial real estate broker.
Among the street’s most prominent high-rises is 555 California, the former headquarters of the Bank of America. More recently, it become known for Donald Trump’s partial ownership of the property alongside Vornado Realty, as well as falling windows that sent glass crashing to the ground during recent storms.
Credit rating agency Fitch revised its outlook of the property’s mortgage on Thursday from “Stable” to “Negative,” reflecting “concerns with the deteriorating market fundamentals for office properties in San Francisco.”
The property’s largest tenant, Bank of America, which holds around 18% of the space, may revise its rent payments downward next year in line with changing market conditions.
The mortgage’s initial maturity date is May and the first of five one-year extension options is under review. The loan’s debt service coverage ratio, a calculation of the property’s income in relation to its debt cost, decreased from 2.6 at the end of 2021 to 1.78 at the end of 2022, according to Fitch.
Kevin Truong can be reached at email@example.com