Fire Sale: $300M San Francisco Office Tower, Mostly Empty

I see a lot of new apartments (I shudder to mention Adam Neuman's new venture Flow as an example: https://en.wikipedia.org/wiki/Flow_(real_estate_company)) that are combinations of work and life and after-work life.

People won't be building those in the suburbs, can you imagine the NIMBY fights? It will take a little bit of time to convert them, but aren't dense cities going to come out in an interesting way? SF has so much to offer geographically.

The building has 27,651 Sq meters. It would cost (with discount) $60m and it would cost (for commercial renovation, according to the article) $50 if we assume the conversion to residential is going to be the same.

An average 2 Bedroom is 150 Sq meters. If we assume an 80% usage capacity (some space has to go for the gym, I guess), then we get 147 apartments. Or $750K per apartment. Obviously, there will be other costs (taxes, finder fees, city, whatever) so let's say $850K per apartment to be safe.

This is an insane price for an apartment; however, this is a competitive price for SF. The people who did a 80% discount on this, seems to have reasonable math pricing in that most of the "value" of the building was derived from the scarcity of commercial building and demand. The new "value" might have been priced based on the residential market.

Is this a case also of landlords not being realistic? I do think plenty of startups would love an 'office' but the costs are quite high while remote work has much lower overheads and keeps more staff happy.

This seems like a fun opportunity for a billionaire to buy as a personal residence, Stark Tower style.

The top few floors can be a penthouse and helipad.

It looks like the most expensive personal residence for sale is $250M [0] so this would be the most expensive to date. And would require renovations.

But I can’t imagine any company wanting an office tower any longer.

[0] https://robbreport.com/shelter/homes-for-sale/gallery/most-e...

> "[...] Mayor Breed, who in an interview earlier this year said that “for this city to be thriving, we need people back in the office.”"

This is such a frustrating statement. If I were going to make this point I would say "for this city to be thriving in its current incarnation, we need people back in the office." Sadly, the mayor, as espoused above, and at least one city supervisor (Matt Dorsey¹), simply do not seem open to the rebirth necessary to make this city thrive again.

In 2020, in preparation for the debates with my co-founders on whether we should establish a fully-remote or fully-in-office culture I spent a lot of time trying to understand what remote work would mean for the Silicon Valley Business Cluster² and San Francisco in particular. I built a working theory for how Silicon Valley functions as a business cluster, San Francisco's role within that cluster, and San Francisco's city finances. Based on that working theory I built a cone-of-possibility broken out into four main scenarios that looked something like this:

* Theory 1 - Remote Work is a Pandemic Only adventure. Workers will exit the major cities, first in fear, then in pursuit of better personal finances. The pandemic will end, and the functions that drew workers into the city in the first place will reassert themselves. Workers will flock back to business clusters, the cities within them, and the offices in which they used to work.

* Theory 2 - Remote Work isn't sustainable for workers in most industries. Workers will exit the major cities, first in fear, then begin to hate their new normals. They will return to the city, and to the office, possibly before the pandemic ends.

* Theory 3 - Remote Work in Software is here to stay. Business Clusters that relied less heavily on Software workers, such as LA's film cluster, or the Boston / Cambridge BioPharma cluster would see a return to the office. Yes, they would have a lower over all demand for office space, but we'd be looking at a mid single digits³ reduction. Meanwhile San Francisco's office buildings would become a ghost town. This reduction in worker need for office space in SF would drive a cascade collapse in its office districts. First the streets are empty of pedestrians, which collapses all the local retail, which draws in more of the unhoused, which trash the place due to lack of supporting infrastructure, which drives up the cost of keeping the streets from looking like the Tenderloin. All the while, commercial leases lapse or go up for sublet in alarming volumes. These forces of reduced software workers, reduced retail spend, and reduced office rents combined to create a financial collapse in SF's city budget, anywhere from 10 to 20% of city revenues. In the worst case, with vacancy reaching into the 70 or 80% range, SF's budget craters by as much as 30% forcing a material reduction in city services which exacerbates the unhoused problem, creating a vicious cycle.⁴

* Theory 4 - Remote Work is here to stay for all knowledge work. In this scenario, all of the financial woes that play out for SF in Theory 3, play out for any city that has a major knowledge worker dependency. The breadth of the commercial real estate collapse begins to threaten the solvency of many banks. The workers, faced with the isolation of in-home work begin to branch out socially in their evenings and weekends. We see a resurgence in hobbies that bring people together.

By my understanding we're currently somewhere between Theory 3 and Theory 4. I think my theories were a bit aggressive on the potential collapse scenarios, but I'm seeing enough of what I predicted to feel comfortable in my reasoning. With that in mind, let's talk about how this ends: The lack of demand for office buildings in many cities results in the collapse of the system used to finance them. Banks and the hedge funds, REITs, pensions and other debtors take a monstrous haircut as the buildings are sold at huge (60%+) losses. A few will make it out OK, having held the buildings long enough to have turned a profit, but none of them walk out of this with their financial projections intact. The buyers of these buildings are, predominantly, in it to blow them up. The buildings are torn down and replaced with purpose-built housing and specialty offices (think biopharma or cultured-meat infrastructure).

This article, and 350 California Street in particular, represent the pin hole in the proverbial dam. I wait with baited breadth.

¹. I spoke with Dorsey for several hours during his District 6 Supervisor election campaign on this topic as I was living in his district. His views can be concretely summed up as a deep belief that tax policy alone can get office workers back. He seems unable, or unwilling, to distinguish between office tenants and office workers.

². https://en.wikipedia.org/wiki/Business_cluster#The_Silicon_V...

³. This is purely a guess, I base this on nothing but my assumption of how many software folks work in these industries.

⁴. That's leaving out the potential residential real estate cascades which in Silicon Valley could actually kill the business cluster itself.

Good riddance to all those who think it's a good idea to build office buildings instead of residential units.

It's that ominous.

Is it cheap? Or was it vastly overpriced? Bit of both?

Or 100 companies with 600k each could buy it