This week's column examines distressed office buildings attracting buyers in San Francisco, how Google's planned exit triggered a loan downgrade, and Dallas vacancy driving debt concerns. Read the entire piece by clicking "read more" below.
Distressed San Francisco office buildings draw buyers: San Francisco's beleaguered office market is displaying signs of recovery as investors snap up distressed properties financed by commercial mortgage-backed securities at steep discounts.
The trend marks a pivotal shift for a market that has struggled since the pandemic. January saw multiple office building liquidations totaling more than $220 million in realized losses to CMBS bondholders, according to a Morgan Stanley report released Feb. 12. Yet increased transaction activity suggests institutional investors view the worst as behind them.
The largest single loss came from a loan on 600 California St. that was paid off with a $144 million hit to bondholders. Lone Star Funds purchased the distressed CMBS debt from WeWork Capital Group and Rhone Group for $361 per square foot, according to CoStar. That represents a steep discount from the $897-per-square-foot price the joint venture paid in 2019.
Morgan Stanley analysts view the acceleration in San Francisco loan liquidations as "indicative of shifting market sentiment, signaling an improvement in institutional confidence in the submarket's broader [commercial real estate] recovery."
San Francisco's CMBS office delinquency rate dropped from 11.4% in December to 7.8% in January following recent liquidations. That places the city well below more stressed markets, including Seattle, at 26.7%; Los Angeles, at 20.2%; and Chicago, at 19.6%, according to Morgan Stanley.
The 600 California St. property defaulted after WeWork stopped making rent payments in March 2023 before filing for Chapter 11 bankruptcy, according to CoStar data. The asset entered receivership in November 2023. WeWork later negotiated a reduced footprint at the property, retaining three floors totaling 43,520 square feet under a restructured six-year lease.
Elsewhere in the city, two adjoining buildings at 180 Sutter St. and 222 Kearny St. sold at auction in December for $5 million, according to CoStar data. SVN Properties acquired the debt-laden properties, which sold for $74.5 million in 2019.
Nashville, Tennessee-based Realm and San Francisco developer Cannae Partners purchased 340 Bryant St. for $10 million in December, according to CoStar data. The four-story, 65,718-square-foot building in the South Beach neighborhood attracted interest from office investors, owner-users and self-storage investors before the sale closing Dec. 23, according to special servicer records.
A $19.8 million loan on 260 California St. transferred to special servicing in March due to imminent maturity default on the 48,000-square-foot office condominium. The loan was liquidated at a loss of $6.9 million, according to Morgan Stanley.
Google exit triggers downgrade: Google's departure from Moffett Tower A at 1000 Enterprise Way in Sunnyvale, California, after three years of failed sublease attempts, has triggered a reassessment of a $770 million CMBS loan tied to the property and two neighboring buildings.
Morningstar DBRS downgraded all classes of CMBS deal MOFT Trust 2020-ABC, citing the properties' declining value and mounting vacancy risks. The credit rating firm slashed its collateral valuation to $549 million from an original $1.15 billion appraisal, a 52.1% drop.
Google occupies 85.7% of the three-building Moffett Towers office campus but has kept all its space vacant since early 2023, according to property inspection reports. The company pays about $18.1 million annually in rent for Tower A alone.
Google intends to vacate the 318,255-square-foot Tower A when its lease expires in June, according to Morningstar.
The Alphabet subsidiary also leases Tower B at 1020 Enterprise and Tower C at 1050 Enterprise, with both leases scheduled to expire within the next five years. Morningstar analysts expect Google will not renew those leases either.
The $770 million loan backing the campus is securitized across eight separate CMBS deals with a loan maturity in 2030.
Leasing in the Sunnyvale market has strengthened, with net absorption, or the difference between move-ins and move-outs, totaling 660,000 square feet over the past 12 months, according to CoStar data. That is the highest annual figure since 2022. Large-scale commitments from major occupiers have driven this improvement.
Moffett Towers owner Jay Paul Co. did not respond to CoStar News' request for comment.
Vacancy drives concerns in Dallas: Kroll Bond Rating Agency has downgraded seven ratings in a $200.3 million CMBS deal, citing rising losses from troubled office properties, including 2100 Ross Ave. in downtown Dallas.
The downgrades affect MSCI 2016-UBS9, part of a financing package now backed by seven assets.
The 2100 Ross office tower drove much of the concern. The 879,458-square-foot, Class A building has seen its occupancy plunge from 85.7% when the debt was issued to 64.3%, according to KBRA.
CBRE, the property's largest tenant, vacated in March 2022 after its lease expired. The real estate services firm had accounted for 20% of base rent at KBRA's 2022 review.
The building now faces the risk of additional tenant rollover. Leases generating 21.4% of base rent expire in 2026. Another 17.1% comes due in 2027.
The loan transferred to special servicing in November after the borrower defaulted on its balloon payment. The debt matured this month with an outstanding balance of $79.9 million.
KBRA estimated a $235,676 loss on the loan, reflecting a 0.5% loss severity. The firm valued the 33-story property at $79.5 million.
The special servicer reported the building is in good condition with no deferred maintenance.
CoStar data shows 225,640 square feet available for lease at 2100 Ross, a 27% availability rate.
Building owner Pacific Elm Properties did not respond to a request for comment.