If left alone, markets are good at sorting out a tough situation like this. The housing market could learn a lesson.

By Wolf Richter for WOLF STREET.

The deal that was first reported in March has now closed – in a little over four months from listing to close, and that was quick for CRE: Another San Francisco office building sold for a discount of close to 70% from acquisition cost, amid a slew of deals happening in that range, indicating that the repricing of CRE properties was effective in jarring the market loose, and allowing new investors to come in at a much lower cost-basis and do something with those older buildings, and invest in them, including converting a few of them to residential properties.

ASB Investments sold its eight-story 145,400 square-foot building at 799 Market (corner of Fourth and Market) for $44 million, or about $300 per square foot, to San Francisco real estate firm Sansome Street Advisors. The deal closed at the end of April, according to the Business Times.

ASB had purchased the building in 2016 for $141 million. It listed the building for sale at the end of 2024 for $50 million. So that was a quick sale in a little over four months from listing to close.

The building’s lower four floors of about 55,000 square feet are retail space occupied by Ross Dress for Less, which has been there for 40 years and last November renewed its lease for another 10 years, according to The Chronicle.

The upper floors consist of office space of about 90,500 sq. ft., of which 52,000 sq. ft., spread over four floors, are listed for lease at Commercial Search, which would give the office portion a vacancy rate of 57%. Of this space, CBRE lists 25,800 square feet on two floors as “available immediately,” with “furniture potentially available,” including 17,223 sq. ft. for sublease.

A discount of about 70% off the prepandemic price has been about the going rate for older office towers, and at this rate, sales have been happening ever since Union Bank kicked open the door in May 2023, when it sold its 300,000 sq. ft. headquarters tower at a discount of about 70% off its original listing price. It essentially repriced the entire market overnight. It was the aha-moment – the price at which deals could be made, at which they made economic sense for buyers.

It put down the marker for all to see. At that point, the illusions of 2019-prices that landlords were still clinging to at the time walked out the revolving door.

Some buildings have sold at a smaller discount, some at a larger discount. And the market, entirely frozen in 2022 and early 2023, thawed. As a result, with the average price down to $310 per square foot, the dollar volume of office-building sales in 2024 was more than the combined sales in 2023 and 2022, according to CBRE, cited by The Chronicle.

The availability rate of office space on the market for lease in San Francisco has been over 35% for nearly two years. In Q1, the office availability rate was 35.6%, including X Corporation’s former headquarters building, according to Savills.

There has been a lot of leasing activity, amid asking rents that continued to decline. The average asking rent fell by 2.2% in Q1 from Q4 and has dropped by 21% from the peak in 2019, back when San Francisco was still the “hottest” office market in the US, with an endlessly hyped “office shortage” that caused companies to grab and hog office space that they didn’t need, just to have something to grow into, and availability rates were in the 8% range.

In Q1, 3.4 million square feet were leased, the highest in Savills’ data going back to 2015. But that included renewals such as by Google, Lyft, and Twilio, and renewals don’t take vacant office space off the market. And some leases were for relocations – the flight to quality that has been ricocheting through the office market over the past two years – which aren’t really helpful either because they’re leaving newly vacant office space behind. And more space came on the market, and so overall, little changed in terms of the availability rate, and it remained above 35%.

So this is a tough market, and it repriced quickly and effectively. Now buyers and sellers are on the same page, and deals are being made. Markets are good at sorting out tough situations, if left alone.

The housing market, where sales volume has remained frozen, even as inventory is piling up nationwide, including in the formerly hottest markets such as in California  and in Florida, could learn a lesson here: If priced right, anything will sell in enough volume, even older office towers with huge vacancy rates.

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