MW San Francisco's office market hit rock bottom. Here's how Wall Street is helping revive it.

By Joy Wiltermuth

The San Francisco office market was left for dead, but Wall Street may be bringing it back to life

As recently as 2023, San Francisco's downtown office market had been written off by the Financial Times as spiraling into the abyss. Vacancy rates had surged to record highs and debt-laden buildings were going for fire-sale prices.

Pandemic-fueled disruption left investors and property owners struggling to figure out how much buildings in San Francisco's financial core were actually worth. The city launched a free-rent program a few years ago to attract businesses to vacant storefronts, but the money that had once flooded into downtown offices had all but dried up.

It was a huge departure from 2019, when vacant space was rare and investors were paying top dollar for a slice of the city's skyline. Then came the pandemic and with it almost three years of nothing much but trouble for downtown. The vibe started to shift in 2023 and became increasingly positive into the tail end of last year.

Lately, in addition to more buzz around happy hour, there have been some concrete signs of a recovery. Office-leasing activity, while still off historic levels, set a new postpandemic record in 2024. More workers have been returning to downtown, and big institutional players, including some that trade as publicly listed companies, were back kicking the tires on office properties. Money - and the ability to borrow it - is now returning for San Francisco's commercial-property owners.

"In the West Coast market, we were shut down a lot longer than other markets were," said Rod Diehl, executive vice president for West Coast regions at BXP Inc. $(BXP)$, San Francisco's largest publicly traded office landlord. "The fact is, we are still lagging, but it's starting to turn for sure."

Diehl sees the city's tech-centric economy as its saving grace, including the wave of artificial-intelligence companies that have recently put down deep roots in the heart of San Francisco. It's still early days in terms of a major turnaround, with more retail vacancies in Union Square, the city's main shopping district, than before the pandemic. Hoped-for progress on turning older office buildings into housing also remains scarce. But BXP, which owns Salesforce Tower, one of the most prominent buildings in the San Francisco skyline, along with other high-end Bay Area properties, has been out prowling for trophy buildings to potentially buy at discounts.

"This is when we've made our biggest moves, when people aren't ready yet," Diehl told MarketWatch. "We have a long way to go. But it's going in the right direction."

Wall Street returns

It wasn't long ago that San Francisco's office sector was largely a no-go zone for lenders and buyers, outside of a few local developers and family offices.

Even as other major cities were perking up again, San Francisco's downtown financial core languished as office workers mostly stayed home, making the city's crises of homelessness and public drug use all the more noticeable. Office buildings up for sale less than a year ago were fetching about 25% of their 2019 peak prices, painting a bleak outlook for a city trying to get back on its feet.

Now, however, there's a notable "office curious" tone among lenders and institutional real-estate owners, said Giovanni Cordoves, regional president for the Western U.S. at KBS Realty Advisors, an office landlord with a national footprint.

"They are looking at these deals and underwriting them, whereas a year ago, they wouldn't spend any time on that," Cordoves said. "You are starting to see more institutional players come in and make some bets."

It certainly helps that well-heeled borrowers have become recently reacquainted with an old friend: Wall Street money. Specifically, banks that specialize in making loans to quickly offload into bond deals have been dipping their toes back into the San Francisco waters.

Uber Technologies Inc. $(UBER)$ secured a $500 million, 6.8% fixed-rate loan from Goldman Sachs $(GS)$ and Barclays $(BCS)$ in early February to refinance its downtown headquarters, two adjacent 11-story glass office towers that were built in 2019 and entirely leased to the ride-share company.

The loan was then sold to bond investors as a "single-asset, single-borrower" commercial mortgage-backed securities deal.

While Uber is the only tenant, it owns the two buildings with Alexandria Real Estate Equities Inc. $(ARE)$ and the Golden State Group, which owns the Golden State Warriors basketball team. The borrower group also injected $104.6 million into the refinancing, according to Moody's Ratings, signaling a long-term commitment to the asset.

Beyond this particular financing, once the bonds are sold, the capital can be recycled and lent against another property. That is what makes this form of debt so attractive to the banks that lend it, as well as to bond investors looking to earn a bit of yield from property markets.

"I definitely think things have bottomed out and are improving," said Jason Callan, a portfolio manager at Columbia Threadneedle Investments. While he didn't participate in the financing for Uber's headquarters, Callan said it feels like the city's troubled office market finally could be turning a corner.

Yet New York office buildings still feel like less of a gamble than a single-tenant building in San Francisco, he said, noting: "There's been a much greater resurgence in return-to-work in New York."

The reality may be that this particularly painful bust cycle could take longer for San Francisco to shake off than previous downturns.

Long road ahead

Last year saw about a dozen smaller office buildings trade hands, albeit at 40% to 80% discounts to prepandemic valuations, said Robert Sammons, a senior research director at commercial real-estate firm Cushman & Wakefield $(CWK)$ in San Francisco.

"The good news is they were actually trading, which proves that there is confidence in San Francisco and its office market," Sammons said, adding that new ownership can mean building upgrades and the ability to attract tenants at lower rents, which can in turn help hasten a recovery.

Whereas San Francisco's top office space in 2019 fetched peak valuations of nearly $900 per spare foot, the 1980s-era buildings that changed hands in the wake of the pandemic were selling for closer to $250 to $300 per square foot.

"These were not trophy-quality buildings," Cordoves at KBS Realty said. "They are trading for a reason, mostly lender-driven."

Office loans have been the biggest driver of the spike in property loans that fail to refinance successfully at maturity, when looking at the performance of bond deals since the start of 2023, according to BofA Global.

Larger "commodity offices" and older, less renovated buildings have struggled the most.

Given that most office buildings in the U.S. were built decades ago and lack major upgrades, it's easy to foresee more distressed sales in the years ahead, especially if property values remain deeply depressed and interest rates stay relatively high.

Still, in San Francisco, the downtown office market has benefited from increased demand for space from startups and bigger players in the AI industry.

The city saw 7.4 million square feet of leasing activity last year, the most since the pandemic, according to Alexander Quinn, senior director of economic research for Northern California at JLL $(JLL)$. Of that total, AI represented about 16% of the leasing activity, he said.

"That's a positive development," Quinn said. "We are more office-centric than we were a year ago."

There's still a long road to a full recovery, with effective office rents recently pegged at about 5% lower yearly in San Francisco's financial district and 9.4% lower in its Union Square area, according to REIS data.

The city's office vacancy rate also remains among the highest in the nation, at 34.3% as of the fourth quarter of 2024, versus 18% during the 2007-09 recession and about 21% after the dot-com crash, according to JLL.

Meanwhile, local real-estate owners have been able to snap up distressed office buildings at a fraction of the estimated cost of $1,200 per square foot for new ground-up developments, according to Quinn. "It's a great time to buy below replacement costs," he said.

-Joy Wiltermuth

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February 26, 2025 13:25 ET (18:25 GMT)

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