In an effort to match its more glamorous competitors in town, real estate firm Colliers announced last week that it was moving its headquarters from a tucked-away building in SoMa to the edge of the waterfront at One Market Plaza.
Once it occupies the 13th floor of the Steuart Street tower next year, Colliers employees will have an unobstructed view of the Bay Bridge. During the previous decade, One Market Plaza was regarded as an exclusive, top-tier destination, attracting the likes of Google, Morgan Lewis, and Visa.
Today, the 1.6 million-square-foot office complex is more than 50% vacant, which has put the owner of the property, Paramount Group, in serious financial trouble. After years of fighting off lenders, the company agreed to sell itself to Rithm Capital later this year.
Representatives of Colliers had to weigh this situation before agreeing to terms at One Market Plaza. Since the acquisition of Paramount has yet to close, the new tenant needed assurances that its lease would be honored in the event Rithm took control or the deal fell apart. Otherwise, they could be thrown out onto the street.
Most importantly, the building has a $850 million bill coming due next year. If Paramount or Rithm default on that loan, that would be a disaster for tenants, with operational staffing and janitorial services potentially reduced or eliminated depending on the building’s cash flow.
In addition, leasing for neighboring offices likely will come to a standstill, since the lender or receiver that ends up controlling the property won’t have the money to invest in improvements to lure new tenants.
“Vacancy combined with a maturing loan is a ticking time bomb,” said one San Francisco office broker who requested anonymity to protect working relationships. “That’s when the lender starts to get involved in every aspect of negotiations, and can override promises made by the borrower.”
To make sure tenants are not left holding the bag, real estate experts recommend they find stable ownerships to lease from if they can, and to avoid buildings that might soon sell for a steep discount.
But if there is a building they love and there are questions about its future, tenants should negotiate a Subordination, Non-Disturbance, and Attornment (SNDA) Agreement with the building’s landlord and lender, where the latter agrees to recognize the new lease if it forecloses, so long as the tenant is paying rent.
Tenant brokers say no SNDA is ever the same and the agreement can sometimes be longer than the actual lease itself, since three parties have to agree to terms. Some agreements might include early termination or rent-reduction clauses, but those are only applicable in the most extreme cases, when a landlord is not fulfilling basic functions. Even then, contracts tend to give owners time to address issues. Hence, San Francisco has more sublease space on the market than usual.
Paramount and Colliers did not respond to requests for comment. According to loan documents, the asking rent for the floor leased at One Market Plaza was between $100 and $115 per square foot, which is comparable to Salesforce Tower, 555 California, and One Maritime Plaza. A source familiar with the deal said the real estate firm agreed to pay within that range.
To justify that kind of expense, a tenant like Colliers would need assurances that their lease would be protected, regardless of what happens to Paramount Group, and that the complex isn’t going to be left to rot.
At least for now, Rithm Capital appears interested in turning the property around. In its press release (opens in new tab) announcing the purchase of Paramount Group, CEO Michael Nierenberg said the company’s real estate portfolio was “situated in cities where we have a strong conviction in the recovery of office market fundamentals.”
It will help that there is an institutional player still involved. Paramount partnered with global investment firm Blackstone to purchase One Market Plaza in 2007. Last February, the pair agreed to pay $125 million to lenders in exchange for an extension of their loan.
This year, Blackstone also acquired a nearby office building for $111.3 million and foreclosed on a 459-room hotel in Mid-Market. Both transactions indicate the firm’s long-term interest in San Francisco.
All of which, put together, probably made Colliers comfortable enough to sign on the dotted line.