San Francisco real estate mogul Greg Flynn has made the city's most expensive office deal in roughly three years, providing the latest sign that the region's battered office market is on the upswing.
Flynn Properties finalized a $177 million deal to purchase Market Center, a 770,000-square-foot complex at 555 and 575 Market St. that was formerly known as the Standard Oil Buildings and later, the Chevron Towers.
At about $220 per square foot, the deed-in-lieu-of-foreclosure deal amounts to one of the priciest office acquisitions to close in the years since the pandemic's outbreak more than half a decade ago, even if it closed at a significant discount compared to previous valuations.
The locally based real estate firm was able to scoop up the two skyscrapers for far less than the $722 million they last sold for in 2019, a period at the height of the San Francisco Bay Area's tech boom that reaped some of the highest prices for office space around the world.
"Covid was tough on San Francisco, but the city's recovery is well under way, and we are optimistic and eager to invest in this recovery," Greg Flynn said in a statement given to CoStar News. "Our belief is never bet against San Francisco in the long run, as it has too much going for it."
San Francisco has seen its office vacancy rate rise 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.
A gradual recovery is now taking hold, however, with high-profile local investors making discounted deals for offices in downtown San Francisco.
That's also 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.
Bullish buyer
Flynn's acquisition kicks off a new chapter for the downtown office properties after the former owner, New York-based Paramount Group, stopped making payments on a loan on the Market Center property and defaulted on the mortgage earlier this year.
The buildings are both about half leased, according to CoStar data, and come with a high-profile tenant lineup that includes companies such as Waymo, Google's self-driving taxi operation, as well as a mix of other tech, financial and professional services firms.
Similar to other firms behind heavily discounted purchases, Flynn has outlined plans to overhaul the office towers as part of an additional investment that will include amenities such as a full-size basketball court, climbing wall, pickleball courts, conference rooms, cafes, lounges and a fitness center complete with yoga and spin studios.
All of that is part of a capital improvement strategy that will help bolster leasing activity and tenant retention, the company said.
The president and CEO of Flynn Holdings, the parent company for both what it calls the world's largest franchise operator as well as a commercial real estate investment firm, said the city's property market has always had ups and downs. And while some analysts have said the COVID-19 pandemic has disrupted San Francisco offices more than any other in the country, Flynn said his recent purchase of the Market Street buildings signified that the city is well on its way to a rebound.
The deal is the latest in a series of high-profile bets Flynn has made on San Francisco's recovery.
Last year, the firm partnered with fellow San Francisco-based investor Ellis Partners to pay about $40 million to purchase 631 Howard St., a 108,785-square-foot property that's fully leased and located along a bustling corridor at the end of New Montgomery Street, one of the city's main thoroughfares.
Boosted US values
Smaller firms such as Flynn Properties continue to dominate the capital markets, though a growing sense of confidence in the long-term trajectory of the national office market is beginning to cajole larger investors into emerging from the pandemic-era sidelines.
Tishman Speyer recently closed on its first office deal since 2019 with the acquisition of a boutique building in New York City's SoHo neighborhood. Real estate investment trusts such as Douglas Emmett, Highwoods Properties and Kilroy Realty Trust have also scooped up some notable properties in recent months, a sign that buyers are willing to place larger bets on the office market's comeback.
Preliminary CoStar data from April shows sales volume more than doubling compared to the same period last year, "an early indication that investor activity is holding firm, even as broader questions about office demand, and the economy, persist."
To be clear, depressed office valuations are still the basis for the deeply discounted deals buyers have been snapping up over the past couple of years. However, some firms have proved willing to pay a higher price tag for properties that offer all or some combination of newness, attractive amenities and solid tenant rosters with long-term deals in place, as well as desirable locations with quick access to transit options and retailers.
The most notable, higher-priced deals that have closed in recent months include Cousins Properties' more than $580 million acquisition of the Sail Tower in downtown Austin, Texas, one of the city's most distinctive office buildings, which is leased entirely to tech giant Google.
And in Denver, Lone Star Funds dropped $132.5 million to buy the Seventeenth Street Plaza tower in one of downtown's priciest office deals to close since the early days of the pandemic.
Ready for a new era
San Francisco's office vacancy rate of 22.6% is a far cry from the 5.6% seen prior to the pandemic. The city's downtown average of 29%, meanwhile, is more than double the national average of 14%.
San Francisco's formerly flourishing Financial District became dotted with half-empty office buildings and half-deserted streets, while owners struggled to keep hold of their properties as the cost of debt increased and values fell.
But the Bay Area's commercial real estate market has shown signs of a rebound, especially in the leasing market. Leasing volume in recent months has reached its highest levels since early 2022, according to CoStar. The surge has largely been fueled by expansions from tech companies, especially in the artificial intelligence sector, driving an increase in demand for new office space.
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.
In the meantime, a growing number of high-profile local investors are snapping up discounted properties in downtown San Francisco. Earlier this month, LendingClub, a digital banking platform, finalized its bid to acquire the 21-story tower at 88 Kearny St., with plans to house its future headquarters there.
And in a separate deal, developer DivcoWest and investor Blackstone Real Estate teamed up last month to purchase a vacant 25-story building at 300 Howard St. in the city's South of Market Street neighborhood for $111.3 million with plans to attract artificial intelligence tenants.