San Francisco has counted its third office sale this year above $100 million, signaling investor confidence in a real estate rebound for the city after the COVID-19 pandemic.
Silicon Valley-based real estate firm Peninsula Land & Capital paid $105 million for the 1980s-era office building at 505 Montgomery St. in the city's Financial District. The firm called the deal a "bold move signaling confidence in the recovery of San Francisco's beleaguered office sector."
The return of big-ticket deals comes as office leasing volumes in San Francisco recently hit their highest levels since 2019, led by the fast-growing artificial intelligence sector, according to CoStar research.
Just two office buildings sold for above $100 million in the city during all of 2024, and those deals were part of a bulk portfolio deal between Norges Bank Investment Management and Nuveen rather than independent purchases.
This year, however, a growing pool of private buyers is stepping up to invest in the city's office market after years of stalled activity largely caused by remote work trends.
In the past 12 months, 110 office property transactions closed in San Francisco, up from the average of 93 sales per year over the past five years, according to CoStar data. However, total sales volume for the past year was $1.9 billion, below the $2.9 billion average over the past five years.
The city's nascent recovery in recent months mirrors what's happening across the United States, where investors are emerging from the pandemic-related woodwork to place bets on the office rebound. The number of deals over the first quarter jumped by about 40% compared to the same period in 2024, according to CoStar data.
Expanding office portfolio
Peninsula Land & Capital Principal Roger Fields announced the deal late last week on X, touting his firm as a "key player in the city's economic rebound."
"If you're spending time downtown, then you know how quickly things are improving," he wrote on X, noting the property is near the coveted high-end neighborhood known as Jackson Square, an area that's sailed above the economic doldrums that the rest of downtown San Francisco has grappled with since the COVID-19 pandemic.
The deal comes two years after Peninsula Land & Capital bought 550 California St., a 14-story building situated across the street from 505 Montgomery St., in a $40.5 million deal. The 365,000-square-foot complex was empty at the time, but the firm managed to fill the building quickly by offering discounted rents and flexible terms to tenants.
The company said in June that it had inked the 50th lease at 550 California, bringing the building's occupancy to 82%.
Peninsula also acquired a 210,000-square-foot office property in Walnut Creek for $22.5 million, part of its goal to target "undervalued assets in suburban markets where demand for quality space remains resilient," it said in a release on the 505 Montgomery deal.
The company expressed "interest in further acquisitions across the Bay Area, focusing on distressed or underperforming assets with strong repositioning potential."
Signs of life
Peninsula Land & Capital is one of a handful of Bay Area real estate investment firms, along with Flynn Properties, DivcoWest, Redco Development and Bridges Capital, that have bet on the imminent recovery of San Francisco's office market by acquiring area real estate at bargain prices, even as institutional investors have continued to mostly hang back.
In April, Blackstone and DivcoWest picked up a vacant 25-story office building at 199 Fremont St. for $111.3 million. A few months later, San Francisco real estate mogul Greg Flynn of Flynn Properties finalized a $177 million deal to purchase 555 and 575 Market St. in the city's biggest office transaction of the post-pandemic era.
San Francisco's office vacancy rate rose from the lowest in the nation in 2019 to the highest, as a perfect storm of COVID-19 pandemic lockdowns, remote work, and layoffs among technology companies caused tenants to downsize at record levels.
But the Bay Area's commercial real estate market has shown signs of a rebound, especially in the leasing market. The city's office vacancy rate of 22.9% is still a far cry from the 5.6% seen prior to the pandemic, but it appears to be trending down; the rate is a dip from the 23% seen a year ago.
In the Bay Area and other tech-concentrated hubs across the United States, AI companies are scooping up large blocks of both sublet and direct space, a trend many stakeholders say is critical in rebuilding occupancy. What's more, a major underpinning of the AI-driven real estate flurry is that many companies have implemented firm in-person mandates, adding to landlords' increasing optimism that the demand for office space will stick to an upward trajectory.
Last year alone, AI office leasing in the San Francisco Bay Area reached about 2.4 million square feet, according to CBRE data, more than doubling companies' existing footprints.
The building at 505 Montgomery spans around 350,000 square feet and is currently 62% leased, said Peninsula Land & Capital. The seller, an affiliate of German asset manager DWS Group, listed it in March after owning the property for two decades.
Fields stressed that a key factor in the building's stability is its tenant roster, which the company said consists of a mix of financial, legal and tech companies headlined by Latham & Watkins. The global law firm recently extended its lease of around 117,000 square feet through 2032.