Two decades ago, a New York real estate firm went all-in on San Francisco, putting the city at the center of its premium office portfolio. Now, after a series of humbling losses, it’s nearly being wiped off the table.
Paramount Group, a publicly traded real estate investment company with market capitalization of $1.7 billion, is close to being sold to Rithm Capital, according to a report from The Wall Street Journal.
The potential sale comes as the company has struggled to hold onto skyscrapers amid a general backsliding of the office market.
At its peak pre-pandemic, Paramount owned six properties in San Francisco totaling more than 4.3 million square feet.
But in recent years, half of those holdings have either been seized by lenders or divested, leaving them vacant and sinking surrounding areas, mainly in the city’s downtown core.
A change in ownership should bring stability and investments to the buildings still in Paramount’s purview, which include One Market Plaza, One Front St., and 300 Mission St.
It’s unclear how Rithm Capital will restructure Paramount’s debts. Financing experts say it can either step into the borrower position or pay down some loan balances and bring in new lenders for assets it wants to keep. Representatives of neither firm responded when reached for comment.
Paramount had already been trying to shore up its balance sheet in San Francisco. In May, the company sold a 25% equity interest in One Front St., a 640,000-square-feet office building, in exchange for $40.5 million of short-term, fixed-rate financing.
According to the company’s financial statements, the asset was valued at $255 million at the time of the deal. Paramount purchased One Front St. in 2016 for $521 million.
Meanwhile, at One Market Plaza, the largest of Paramount’s San Francisco properties, the company last year agreed to pay its lenders $125 million in order to push the loan maturity to 2028.
On the company’s latest earnings call, in July, executives said they were in the process of adding amenities to both One Front St. and One Market Plaza to retain tenants and attract new ones.
One Market Plaza is losing three high-profile tenants: Google, Visa, and law firm Morgan Lewis.
Earlier this year, Paramount disposed of Market Center, a 770,000-square-foot office property comprising two buildings at 555-575 Market St. Local franchise operator Greg Flynn purchased the remainder of Paramount’s debt for $177 million, a 76% discount on the purchase price.
Another building, 55 Second St. (formerly known as the KPMG Building), is being marketed for sale by lenders. A neo-Gothic building at 111 Sutter St. was internally marked down to $0 as a “noncore asset” — meaning Paramount has stopped investing in upgrades or renovations.
At the end of the second quarter, the company reported that its remaining San Francisco portfolio was about 75% leased. Its portfolio in New York clocked in at 88%.
Paramount went public in 2014, raising a record-breaking $2.29 billion in its IPO.
The possible sale to Rithm comes as the U.S. Securities and Exchange Commission has begun probing Paramount over suspicious executive spending between 2022 and 2024. In April, it was revealed that the company did not disclose $4 million in payments to CEO Albert Behler for personal expenses and business interests, including jet-chartering services and fees paid to a design firm owned by his wife.
Rithm Capital is a publicly traded global asset management company that manages a mix of real estate investments and financial services. It also buys and manages mortgages, while making loans through its wholly owned subsidiaries. Its total assets grew from $3 billion in 2013 to $32 billion a decade later, according to its website.