What Are Older Workplace Towers Value? Right here’s the First Sale in San Francisco’s New Period of Workplace CRE

Union Bank struck a deal to sell their tower at 75% of the original list price, setting the first new benchmark. Other towers are waiting in the wings.

By Wolf Richter for WOLF STREET.

We’ve tracked what older office towers, many from the 1980s and 1990s, are worth when they are eventually sold, either in a foreclosure sale or a regular transaction. Two Houston towers were sold in a foreclosure sale at a price that saw the lenders — holders of commercial mortgage-backed securities (CMB) — lose 80% and 88%, respectively. CMBS holders suffered a 100% loss in the foreclosure of the vacant 1980’s 46-story “One AT&T Center” in downtown St. Louis.

Foreclosures are brutal and belong to the extreme. Regular selling is a little less brutal, and we’ve documented a number where investors in CRE bonds have suffered losses in the range of 35% to 50%.

These losses from CRE debt are in addition to landlords’ equity losses. In the big losses in office debt so far, it has been investors who have been on the hook, not banks.

Now we have the first sale in the new era of home office and office downsizing in San Francisco, which has overtaken Houston and Dallas as the worst major office market in the US. There are a number of office towers on the market. One of them, Union Bank’s headquarters at 350 California Street in the Financial District, has found a buyer.

Union Bank, which owns the 300,000-square-foot tower and uses a portion of it, put it on the market as a sale-leaseback, where it would lease back a small portion of the tower. The rest would be free. In 2020 it was trading at $250 million with zero interest rates. In 2022 it pulled the listing. During this time Mitsubishi UFJ sold Union Bank to US Bancorp, the fifth largest bank in the US; The deal was completed in December 2022.

Then, in February 2023, Union Bank re-listed the tower for $120 million.

The company has now entered into a deal to sell the building to San Francisco-based SKS Real Estate Partners and South Korea-based Genesis for $60-67 million, according to sources cited by the San Francisco Business Times. This would be around 75% off the original listing price.

The price of $200 to $225 per square foot will set a benchmark for the value of older office towers in San Francisco. A sense of reality sets in. And it could make other deals possible. Until this sale, nobody knew what anything was worth in this new era, when about a third of San Francisco’s office space is in the rental market.

This tower does not involve debt. There are quite a few office CREs that are owned by corporations that occupy them and may be debt free and are up for sale, including the nearby 550 California owned by Wells Fargo, which originally bought it for $160 million US Dollar then withdrew the listing and will try again in 2023.

So this tower of Union Bank isn’t a story about lenders stuck with huge losses, and it’s not a story about a landlord defaulting on an adjustable-rate mortgage whose interest rate has doubled in two years. These are the problems currently plaguing office CRE.

The Union Bank deal is a story about a bank selling a tower it has owned and occupied for many years that has been depreciated year after year, reducing the book value of the building’s original purchase price. Also, according to The Registry, $41 million has been poured into the building over the years for seismic and other upgrades, as well as various renovations.

This is the easiest kind of deal in a very tough market. And there are a few other deals like this that could happen in San Francisco, including Wells Fargo’s tower, that could further define the benchmark price.

But there are already two massive defaults in San Francisco: PIMCO’s Columbia Property Trust has defaulted on the debt of the 201 California St. and 650 California St. office towers.

The price of $200 to $225 per square foot of the Union Bank tower at 350 California sends shivers down the spines of holders of the CMBS that hold the defaulted mortgages on those two towers. they don’t want to have to sell those towers in a foreclosure; You’ll be motivated to negotiate a deal with Columbia Trust because foreclosures get really ugly in stressed markets.

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