Commercial Real Estate Crash Hits San Francisco

Commercial Real Estate Crash Hits San Francisco
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Union Bank made a deal to sell its tower at 75% off original listing price, setting the first new benchmark. Other towers waiting in the wings.

We have been tracking what older office towers, many of them from the 1980s and 1990s, are worth when they finally do sell, either in a foreclosure auction or in a regular transaction. Two towers in Houston sold at a foreclosure auction at a price where the lenders – holders of Commercial Mortgage-Backed Securities (CMB) – lost 80% and 88% respectively. In the foreclosure sale of the vacant 46-story 1980s “One AT&T Center” in downtown St. Louis, CMBS holders took a 100% loss.

Foreclosure sales are brutal, and these are among the extremes. Regular sales are a little less brutal, and we’ve documented a bunch where investors in CRE debt have taken losses in the range of 35% to 50%.

These losses on CRE debt are on top of the equity losses that landlords took. So far with big losses on office debt, it has been investors that were on the hook and not banks.

Now we have the first sale in the new-era of working-from-home and office-downsizing in San Francisco, which has surpassed 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, the headquarters of Union Bank at 350 California Street in the Financial District, has found a buyer.

Union Bank, which owns the 300,000-square-foot tower, and occupies a portion of it, put it on the market as a sale-lease-back, where it would lease back a small portion of the tower. The rest would be vacant. It listed it in 2020 at $250 million, amid zero interest. In 2022, it pulled the listing. During that time, Mitsubishi UFJ sold Union Bank to U.S. Bancorp, the fifth largest bank in the US; the deal closed in December 2022.

Union Bank then relisted the tower in February 2023 at $120 million.

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

The $200 to $225 per square foot price will set a benchmark in San Francisco for what older office towers are worth. A sense of reality is setting in. And it might make other deals possible. Until this sale, no one knew what anything was worth in this new era when about one-third of the office space in San Francisco is on the market for lease.

This tower doesn’t involve debt. There is quite a bit of office CRE that is owned by companies that occupy it, and they may be debt free, and they’re listed for sale, including the nearby 550 California, owned by Wells Fargo, which originally listed it for $160 million, then pulled the listing, and will try again in 2023.

So this Union Bank tower isn’t a story about lenders that got stuck with huge losses, and it isn’t a story about a landlord defaulting on a floating-rate mortgage whose interest rate doubled in two years. Those are the kinds of issues that are now ravaging office CRE.

The Union Bank deal is a story about a bank selling a tower that it has owned and occupied for many years, that it has depreciated year after year, bringing down the carrying value of the building’s original purchase price.  According to The Registry, it also plowed $41 million into the building over the years for seismic and other upgrades and various renovations.

This is the easiest kind of deal to make 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 defaulted on the debt of the office towers at 201 California St. and at 650 California St.

The $200-$225 per square foot price of the Union Bank tower at 350 California is sending cold shivers down the spines of holders of the CMBS that contain the defaulted mortgages of those two towers; they do not want to have to sell those towers in a foreclosure sale; they’re going to be motivated to work out a deal with Columbia Trust, because foreclosure sales in stressed markets get really ugly.

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