The owner of two iconic San Francisco office properties is likely to give them up as major tenants pull out and the final due date for debt payments draws nearer, according to an earnings call with the New York real estate firm the Paramount Group.
One of the properties is known as the Market Center, a 770,000-square-foot brutalist office complex split across two buildings at 555 and 575 Market St. in the middle of the Financial District. The complex used to serve as the headquarters for Standard Oil and Chevron.
The other is a neo-gothic structure a block away at 111 Sutter St. that was the fictional address of private detective Sam Spade’s office in the noir novel The Maltese Falcon, which in 1941 was made into a classic film starring Humphrey Bogart.
Paramount executives said in the Feb. 15 earnings call that they are in negotiations with their lenders on the two properties, but both investments have already been marked down to zero on company books. Executives say debt on the buildings far exceeds their current market value.
“[T]here is a strong possibility that these assets may not be in the Paramount portfolio going forward,” Paramount Chief Operating Officer Wilbur Paes said on the earnings call. “They are currently a drag on occupancy, a drag on earnings, a drag on leverage, and we get no credit for it in our stock price.”
Both buildings are around 45% vacant, and that number is expected to grow as additional leases expire and more tenants vacate the buildings.
Market Center and 111 Sutter were purchased by Paramount near the top of the market in 2019 in deals that valued the buildings at $722 million and $227 million, respectively. Soon after, the pandemic hit, sparking a full-scale rethink on how office space is used.
In the call, Paramount executives gave insight into what owners of distressed properties are going through as opportunistic buyers pick through their San Francisco portfolios to separate the wheat from the chaff.
Keeping well-heeled trophy properties in the portfolio often comes with its own upfront costs.
Paramount and its partner Blackstone paid down $121 million in debt to keep One Market Plaza, its largest and most valuable San Francisco asset, and secure a three-year extension on a $975 million loan on the property.
But even a property like One Market Plaza, which is currently 95% leased, carries potential concerns, namely a 300,000-square-foot Google lease that’s scheduled to sunset in 2025.
Next year, a full 1.1 million square feet of Paramount’s leases in San Francisco—more than a third of its total footprint in the city—are due to expire.
Paramount did not respond to a request for comment on its plans in San Francisco.
Buildings for sale
Commercial real estate brokers said the expected wave of defaults and foreclosures in the city has instead been more of a steady dribble, as lenders seek to negotiate workarounds and loan modifications for properties that are underwater.
Regardless, buildings are hitting the market in San Francisco at massive discounts.
Three commercial real estate sources confirmed that 255 California St. is on the market at a suggested price of around $49 million, about a 70% drop from the $156 million it sold for in 2019. Private equity firm Rockpoint Group is working with lender Nuveen to try to offload the property.
Two commercial real estate sources also said 795 Folsom St. in SoMa is currently for sale. The building—which previously served as the headquarters of Twitter—is, in some ways, a litmus test for the market.
Owner ASB Real Estate Investments, which paid $110 million for it in 2013, has selected real estate firm Cushman & Wakefield to market the property.
The expected price? Around $51 million, less than half of what it went for more than a decade ago.