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Doom Scoop: Real Estate Investors Spy Opportunity in San Francisco’s Bleak Market

Written by Kevin TruongPublished Jun. 12, 2023 • 5:00am
San Francisco's challenging real estate market has created a generational opportunity that comes with major risks but also the potential for huge rewards. | Jason Henry for The Standard

By the end of next year, a seven-story office building in the South of Market area will be transformed into Taiwan's governmental headquarters in Northern California.

The Taipei Economic and Cultural Office (TECO)—Taiwan’s de facto diplomatic mission—spent nearly $53 million on the newly constructed building at 345 Fourth St., and officials plan to spend millions more to outfit the property to house its consular, education, economic, tourism and immigration divisions, a rooftop space for hosting galas and a cafeteria for visiting dignitaries.

READ MORE: Westfield Gives Up Downtown San Francisco Mall

The Taipei Economic and Cultural Office (TECO) in San Francisco on Friday. TECO spent nearly $53 million for the newly constructed building in SoMa at 345 Fourth St. and plans to transform the property into a seven-story consulate. | Isaac Ceja/The Standard

TECO’s purchase plants an anchor in the key West Coast gateway city for Eastern Asia. The deal more than doubles the amount of space the organization currently leases at 555 Montgomery St., representing a rare upsizing and investment in a commercial real estate market sorely in need of good news.

Office buildings in San Francisco are facing a record-breaking 30% vacancy rate—a seven-fold increase from the start of 2020—and those figures are expected to rise. Delinquencies in the commercial mortgage-backed security market, a precursor to property foreclosures, have ticked up each month this year, and dozens of buildings in the city have loans coming due over the next few years.

Many commercial real estate experts are calling this one of the most difficult economic environments they’ve seen, but TECO’s announcement shows that some investors are still betting on San Francisco in the long term.

“There’s more opportunity today in San Francisco than there has been in the 30 years I’ve been in the market here,” said John Jensen, a commercial real estate broker at Colliers.

Of course, not every real estate player has a national government to back them.

“Those people who have the most distress inside their portfolio will be distracted from the opportunity in front of them,” said Barry DiRaimondo, CEO of San Mateo-based developer SteelWave. “And there are a lot of people in that boat.”

For the first time in years, DiRaimondo said, his company is considering buying into the San Francisco market, lured by the promise of discount deals in a city previously characterized by a pricing boom fueled by tech.

San Francisco's office market has been facing record-breaking vacancy rates that continue to rise. | Camille Cohen/The Standard

“If you had to sell an office today in San Francisco, your values are off somewhere between 40% and 80% of where they would have been 18 months ago—that’s pretty dramatic,” DiRaimondo said. “If you own real estate, that’s a challenge. If you’re looking to buy, you’re probably buying in at a basis that has been unmatched for the last 25 years.”

Evidence of the trend can be found in a number of recent examples, including buildings poised to sell at more than 70% discounts to their pre-pandemic price.

The majority of the office supply in San Francisco is what DiRaimondo calls “commodity office space,” the types of properties that wouldn’t particularly stand out in a crowd. These properties are particularly vulnerable to losing tenants to nicer spaces and more likely to face refinancing troubles when loans come due.

SteelWave’s specialty is creating “environments that motivate people to actually go to work,” DiRaimondo said. SteelWave’s strategy will ultimately depend not on the success of the overall market recovery but just providing more attractive leases than those found in the building next door.

“In order to convert vertical buildings into super cool, differentiated space, you almost have to be buying in at land value,” DiRaimondo said. “I think that’s kind of where we are.”

Investing Against the Herd

Michael Shvo, CEO of New York-based developer Shvo, is betting on his own Downtown revitalization centered on his $1 billion purchase and redevelopment of the Transamerica Pyramid and surrounding properties.

Since taking control and beginning renovations of the pyramid, Shvo said he has signed multiple leases at $200 to $250 per square foot—double the pre-pandemic rates.

The Transamerica Pyramid, which is located at 600 Montgomery St. in the Financial District in San Francisco, looms above Mark Twain alleyway and the Transamerica Redwood Grove. | Camille Cohen/The Standard

“It tells you that if you build the right thing and if you deliver an elevated product—it helps to be in the most iconic building on the West Coast," Shvo told The Standard. “Tenants are not only coming; they’re paying twice what they would have paid before Covid.”

Shvo said now is “100% the time” to be thinking about investing in commercial real estate in San Francisco.

“What you want to do is create the product in the slow time, in the dips in the market. Buy it, upgrade it, so when you come out of the downturn, you have the best product out there,” Shvo said. “Investors, in general, are like sheep; there’s a herd mentality. When things are bad, everybody sells. When things are good, everybody buys.”

Shvo’s company has been swimming against the stream in the current market, purchasing some $4 billion in real estate across the country during the pandemic. A major market downturn has provided rare access to the “trophy assets” Shvo prefers.

The first movers in this type of market correction are usually high-net-worth family officers or well-capitalized players who have the cash supply on handy to finance deals.

“We are doing a bunch of deals right now that are predominantly cash deals because the borrowing cost is prohibitive from doing a lot of traditional deals that you would do,” Shvo said.

Michael Shvo, real estate developer and CEO of Shvo, speaks at the celebration of the Transamerica building’s 50th birthday in San Francisco on Dec. 6, 2022.| Camille Cohen/The Standard

This approach comes with major risks, but also the potential for huge rewards.

“The winners and losers are going to be separated out by who moves first and who moves last,” DiRaimondo said. “Those people who are trying to find the bottom of the market before they invest have a better chance of slicing off the tip of their finger than they do of getting it right.”

Breaking the ‘Doom Loop’

Properties that traded hands at sky-high prices in the years immediately prior to the pandemic face particular trouble. Those loans are coming due and often with debt higher than the current market value of the building.

However, most current transactions are frozen. Lenders—typically banks—are disinclined to foreclose and take control of properties and are negotiating short-term extensions or more reasonable terms with borrowers. At the same time, property owners are loath to sell their assets at major losses unless forced.

But this “extend and protect” strategy may only be delaying the inevitable, said Arpit Gupta, a finance professor at New York University.

Gupta co-authored a 2022 paper that helped to coin the term “urban doom loop,” which has taken hold in cities with struggling post-pandemic recoveries. San Francisco is facing the potential of a commercial real estate “doom loop” and Gupta believes policymakers should be moving to disrupt the downward spiral.

Gupta cited growing delinquencies and declining lease revenues as signs that the problem is worsening. Regional banks, which hold the bulk of commercial real estate debt and are facing their own outside pressures, could shut off their lending and pull back from the industry.

That would be followed by large-scale foreclosures and banks selling off real estate assets in fire sales, adding distress to the banking industry. Gupta pointed to the 1980s and early 1990s, when more than 1,000 banks closed due to a combination of high-interest rates and commercial real estate issues. 

“The idea of waiting a little bit and hoping for recovery becomes a lot harder when you’re talking about assets that are experiencing long-term structural impairment,” Gupta said. 

Inaction could create cascading impacts that weigh on the larger financial system. Gupta believes policymakers’ best option is to provide a financial cushion that helps properties reposition. He thinks a mix of zoning and planning changes, in combination with subsidies and tax incentives, can further push the process along, incentivizing building owners to sell and realize their losses.

A model of Downtown San Francisco is displayed in the entrance of Heller Manus Architects office in the Transamerica Pyramid. | Kevin Truong/The Standard

At Heller Manus Architects’ office in Transamerica Pyramid, a major portion of the entrance space is taken up with a massive 3-D model of Downtown San Francisco. Principal Stephen Buchholz has stuck blue Post-it notes on individual buildings, signaling their high potential for conversion based on the firm’s experience.

After a presentation on his firm’s prior conversion projects, Buchholz candidly admitted his phone line for conversion work has been silent.

“I'm surprised it has taken a while for someone to actually make a move,” Buchholz said. “I don’t see (landlords) getting to the panic stage yet.”

Jay Mancini, managing member at G&M Realty Ventures, said he thinks the foreclosure process will take time to shake out over the next couple years before the gears start turning in earnest.

“I think a lot of buildings have got to move into actually being in default,” Mancini said. “The wise decision is to wait until the distress is there and then come in and purchase.”

Kevin Truong can be reached at

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