Downtown SF's 350 California building sold at a bargain price
The former Union Bank building on California Street in San Francisco’s Financial District has a buyer. But for those looking for additional housing to save the city’s battered and beleaguered downtown, it might not be the right sort of buyer.
News of the pending sale of 350 California St. to San Francisco-based office developer SKS Real Estate Partners at a bargain basement price of less than $225 a square foot — about 75% lower than the property had been offered for in 2020 — was being celebrated Monday as a market-defining transaction that will establish a comp of what an empty Financial District office building is worth in the post-pandemic city.
But the pending deal, first reported by the San Francisco Business Times, also is likely to disappoint those hoping that a housing developer would inject new life into the financial district by converting the 300,000-square-foot building to apartments or condos. For more than two decades, SKS has been among the city’s most successful office developers, specializing in repositioning underused properties. But the company is not in the residential development business.
SKS Real Estate Partners did not respond to calls seeking comment.
Real estate sources familiar with the deal said there were about 30 offers, but many were well below the eventual price and only four or five were from proven investors with the wherewithal to close the deal. None of the serious offers were from housing developers.
Housing would be “the highest and best use” of 350 California St., according to Matt Regan, senior vice president of the business advocacy group Bay Area Council.
“The best way to make sure San Francisco is not dependent for its survival on a quarter of a million daily commuters is to have residents living in the downtown core,” he said. “We are never going to get back to the pre-COVID levels of office occupancy.”
One residential development group that took a hard look at the property, but ultimately decided not to bid, was Emerald Fund, which a decade ago converted a former office tower at 100 Van Ness to apartments. Emerald Fund President Marc Babsin said there was a lot to like about 350 California as a potential apartment conversion but that the deal was too risky for the group’s capital partner, a union pension fund.
Babsin said 350 California St. has good bones for apartments and at a base price of less than $225 a square foot a conversion might be “doable,” but only if the city were to cut fees and eliminate inclusionary housing requirements for conversions. Right now city officials are looking at legislation that would cut requirements from 23% to between 12% and 15%.
“It’s the kind of thing that would work,” he said. “It’s a beautiful building in a good location with great window lines and views.”
Meanwhile, on Tuesday, the implications of a $225-a-square-foot price tag for a “Main and Main” Financial District tower rippled through San Francisco real estate circles.
While the $225 a square foot is about 75% less than what the building was originally listed for in 2020, it would still represent a $65 million investment in a neighborhood in which nearly 30% of Class A office space is vacant.
Robert Sammons, senior research director at Cushman & Wakefield, said the deal, if completed, would “give us an idea of a price point, after a few years of not knowing” what downtown property is worth.
“If that’s the price, it makes the market,” he said. “We figure out where the bottom is and where we go from here.”
Tony Crossley, a veteran broker with Colliers International, called the push for residential conversions a “red herring” that is taking up the attention of policymakers and politicians while having little chance of happening.
He pegged the cost of converting 350 California at $600 a square foot in construction costs alone. Adding the purchase price, and other soft and carrying costs, including paying back a lender, would push the investment to well over $1,000 a square foot — far more than the building would be worth.
“It doesn’t make any economic sense,” he said. “The math is completely upside down.”
In contrast, he said, renovating the building for continued office use is “something you can get your head around.” An office investor might expect to pay about $100 a square foot to renovate the building and another $100 a square foot in carrying costs.
“The only gamble there is you have to believe the market is coming back,” Crossley said. “It’s a bold play, and not a short-term one, but fundamentally it’s a good building in a great location.”
Developer Eric Tao of L37 Partners said that unless the city cuts fees and affordable housing requirements, conversions work only if the purchase price is less than $100 a square foot.
The 350 California St. sale could help set a price for 180 Howard St., which the State Bar of California is selling, and 550 California St., which Wells Fargo is marketing for sale. That is what happened in the aftermath of the Great Recession in 2010, when 351 California St., a building across the street from the Union Bank building, sold for $35 million, about $250 a square foot. That was followed by the sale of two Class B office buildings, 255 California St. and 115 Sansome St., at a similar price per square foot.
If history is prologue, SKS could be rewarded for its gamble: In 2019, 351 California St. went on to sell for $108 million, or $775 a square foot; 115 Sansome fetched $83 million, or $620 a square foot in 2016; and 255 California St. last traded in 2019 for $156 million, or about $850 a square foot.
So far, the only conversion application that has been filed with the city is for the historic Warfield building at 988 Market St. Architect Charles Bloszies, who has worked on office-to-residential conversions in the past, said his office has been busy receiving calls about the potential of conversions but, so far, it’s mostly land use attorneys and brokers — not investors with money to spend.
“Everybody is interested and everybody is looking for more and more information,” he said. “But no owners are coming forward with an exact building they want to convert.”
Housing Action Coalition Executive Director Corey Smith said it was heartening that Emerald Fund spent time looking at the potential conversion but “not shocking they couldn’t make it work.”
“We are not going to convert our way out of this,” Smith said.
Source: San Francisco Chronicle
