What Are Older Office Towers Worth In The New Era? Second San Francisco Office Tower Sells For 70% Off Original Listing Price

Authored by Wolf Richter via WolfStreet.com,

The burning question arose over the past two years what these largely empty older office towers in San Francisco are worth.

The market had frozen over.

There were no transactions because no one knew what anything was worth as San Francisco’s office market has morphed in just a few years from being one of the hottest office markets in the US with a vacancy rate of 7% in 2019 and some of the highest rents in the US, to being put on ice by working-from-home. About 33% of all office space is now on the market for lease – worse even than Houston, which was for years the worst office market in the US.

So now there’s the second deal in about a month — though the sale hasn’t closed yet. Wells Fargo found a buyer for one of its office towers in San Francisco, the 13-story 355,000-square-foot 1960s-era tower at 550 California, across the street and around the corner from its headquarters tower on Montgomery.

Wells Fargo had purchased the tower in 2005 for $108 million. It is vacating the building. Last year, it listed it for $160 million, but then pulled the listing after receiving bids reportedly below $40 million. Earlier this year, it engaged real estate investment bank Eastdil Secured to relist the tower.

And it has now made a deal – the name of the buyer has not been disclosed – for about $42.6 million to $46 million ($120 to $130 per square foot), according to sources cited by the San Francisco Business Times. That would be 71% below the original asking price and nearly 60% below the purchase price in 2005.

The first tower to find a buyer in the new era of working-from-home and office-footprint reduction had been the Union Bank headquarters tower at 350 California, which changed hands in early May at 75% off the original listing price in 2020, at around $200 to $225 per square foot. But it had undergone $41 million in seismic upgrades and renovations recently.

The price of the Wells Fargo tower ($120 to $130 per square foot) and the price of the Union Bank tower ($200 to $225 per square foot) now serve as benchmark for other older office towers. It seems, as price discovery is beginning to take place, the door has been opened to more deals.

And maybe the buyers, who will have a much lower cost basis, can figure out what to do with those towers, such as leasing office space at lower rents that are attractive to potential tenants, which could then start bringing down the prohibitive office rents in the City.

Office-to-residential conversions are now a hot topic in San Francisco. Everyone knows that if it can happen, it should happen. Earlier this year, the mayor’s office introduced legislation that would amend the planning codes to make conversions easier.  So we’re off to the political races. But a conversion, if it even makes economic sense, will take years.

Neither the Wells Fargo tower nor the Union Bank tower involve defaults, foreclosure sales, and huge losses for creditors. There are no hapless CMBS holders involved that would lose their shirts. The towers did not serve as collateral for debt. Both properties have been owned by banks for many years to use as their offices. But the banks – like most other major companies in the area – are shrinking their office foot print. And in doing so, they’re now establishing benchmark prices.

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