Buying high and selling low is not a smart strategy, but sometimes it’s the only one left.
Paramount Group Inc., a New York-based skyscraper owner worth billions, is paying up on bad San Francisco real estate bets made just before the pandemic.
After marking the value of two of its major office investments down to zero last year, the company just did it again, meaning half the properties it owns in San Francisco are essentially deemed worthless on its books.
The move allows Paramount to do some creative accounting to cut its losses. It also unlocks the ability for new blood to come in and revive languishing properties for cheap — something the city desperately needs if the office market is ever to rebound.
Between 2016 and 2019, the New York-based firm bought large stakes in four downtown skyscrapers, tripling its holdings in the city to six properties spanning 4.3 million square feet. At their peak, these buildings were collectively valued at more than $1.8 billion.
Timing is everything in commercial real estate. After the pandemic upended the office market, San Francisco landlords like Paramount were left with major debt that no longer matched declining property values.
The most recent poster child of this problem is the KPMG building at 55 Second St. The building’s namesake accounting firm is relocating next year, along with software company Rippling, raising the vacancy rate above 50%, according to CoStar data.
At the company’s quarterly earnings report Friday, Paramount announced it had internally charged the remaining value of the building as an “impairment loss.” While the loan it used to purchase the building isn’t technically due until October 2026, Paramount is effectively telling its investors that it’s giving up on the property and flying a flag on the market that it is readily available to buy.
That signaling mechanism has worked with one of its other albatross buildings: Market Center, a 770,000-square-foot brutalist office complex split across two buildings at 555 and 575 Market St.
Paramount CFO Wilbur Paes indicated during the earnings call that the lender had “awarded” a deal — on course to close in the second quarter of this year — for the sale of the property it defaulted on last year. Flynn Properties, led by San Francisco businessman Greg Flynn, is reportedly the front-runner in acquiring that debt.
It would be far and away his biggest San Francisco real estate play. Flynn’s recent deals in the city — a defunct hotel and Class B office building — have each been for less than $100 million and only a fraction of the size of Market Center.
A representative of Flynn Properties declined to comment. Purchasing a building at a lower debt or basis allows the new owner more breathing room for rents and leasing.
“The assets will come off our books,” Paes said of the impending deal. “And we’ll recognize a tax loss that we can play around with.”
This time last year, the firm had also written off 111 Sutter St., a neo-gothic tower totaling 293,000 square feet, purchased in 2019, that is now only half occupied, according to CoStar.
Paramount’s other trophy buildings are also losing key tenants. After JPMorgan acquired First Republic Bank in 2023, it terminated the latter’s lease at One Front St. Meanwhile, Google wound down its lease at One Market Plaza, another Paramount property, and added more than 100,000 square feet to its existing presence elsewhere at Hills Plaza at 345 Spear St.
Peter Brindley, head of real estate at Paramount, told investors that 66% of the company’s expiring San Francisco leases were from Google and JPMorgan. With those moves in motion, the company is now focused on retrenching at its existing properties.
Last year, a Paramount property at 300 Mission St. was able to attract Rakuten from 160 Spear St. for a 29,000-square-foot lease.
CEO Albert Behler, who has led Paramount since 1991, called San Francisco a challenging office market “not as diversified as the New York economy” but with “deep value.”
When it made its last batch of purchases, low interest rates and a booming tech industry squeezed San Francisco’s office vacancy below 5% and drove rents to record highs.
A San Francisco commercial mortgage professional said REITS like Paramount are better positioned to emerge from this down cycle because they are usually not entirely liable for foreclosures.
Loan documents show that Paramount is mainly involved in joint ventures in its San Francisco properties. That means risk is spread more evenly.
Paramount’s net loss last year, including dividends, was $38.6 million versus $205 million the year prior.
The firm transformed from a private office to a public company after it raised a record-breaking $2.29 billion in 2014. The majority of its 11 New York properties are concentrated in Manhattan.
“They established a nice beachhead in San Francisco during the good times,” said a REIT office broker who requested anonymity to protect relationships. “But now you’re seeing they bit off more than they could chew.”
Correction: This story has been updated to accurately reflect the financial relationship between different properties in Paramount’s portfolio.