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: Another older office building in San Francisco 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 Real Estate Investments, a division of ASB Capital Management LLC, 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 relatively quick sale 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 building is nearly 60 years old.
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.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how:
The key appears to be the willingness to inflict pain on the old holders who made errors in judgement which creates opportunities for new players.
Inequality is a key driver in this. Without some degree of inequality and the prospects of inequality there would never be liquidation and never be renewal.
Pain is a natural part of our existence. We don’t have to like it or wish it on others, but where would we be without it.
While a very Buddhist outlook, I think it is simply people making choices in the market rather than a desire to inflict pain. This just happens as a natural result of our economic model not some ingrained human condition. We obviously have massive inequality in society but not sure I would apply that to players in the CRE market. You win some and you lose some and you know that risk exists going in.
Make that default IF one is wealthy enough…..”justice” is just another USA Capitalism commodity….like “human resources”.
“old holder who made errors in judgement”…..are you smoking something? I’ll bet, at the time, their RE decisions were based on a lot of good due diligence. No one can predict the future. And if they could have, they probably wouldn’t have bought the property,
Doing due diligence doesn’t exonerate people from making a mistake.
“No one can predict the future.”
True but when you see very large yr over yr percentage spikes in (alleged) valuations/transaction prices…while other macro metrics are lagging far behind (or going the opposite direction) caution is indicated.
But a certain cohort of the witless like to slam their foot on the accelerator like another (Asset X) will ever be built/be available – “absolutely necessitating” paying some idiotic price.
That is pretty much the history of America post 2000 (with an enormous assist from DC ZIRP leverage fuel).
I tend to think that the key driver is a paucity of leasers.
I mean we are talking about CRE, not stocks.
70% off ? Who pays off the loans with the banks ?
There was no default involved in this deal. ASB (the seller) is an asset manager, investing client funds in real estate. Like I’ve been saying for the past two years: most of the US CRE losses have been borne by investors globally, not by banks. Which is why the Fed has no problem with letting it rip.
There is always the threat of everything being interconnected…those overseas investors might very well owe money to US banks in some other way.
When year after year of ZIRP inflates essentially all asset (collateral) classes, all those assets (collateral) tend to be correlated to each other…because everything becomes correlated to artificially low interest rates (which have driven the valuation calculations).
So the longer the ZIRP baloney goes on, the greater the risk of a cascade failure/domino effect.
It would be nice to think the Fed had enough brains to know this pre-2000 (and they probably did) but post-2000 the Fed has simply pandered to the perpetual fiscal and governance failures of the G – and set out to neuter every negative market signal in the name of (temporary, oh so temporary) “stability”.
Essentially, suicidal.
People like offices. They’ll return to them eventually.
Lordship,
I may be as cynical as you are sarcastic.
Managers love offices. It is so easy at 8AM to walk the cubicles for a bed check to make sure everyone is home safe.
Other people who work for managers and paid much less, may find WFH to be much more convenient. I may sound like a rebellious teen, but I do see an efficiency with avoiding 2 hour commute daily and constant distractions in an office by managers who want long meetings. I do miss the free lunches but my efficiency does not.
Will People return to an office? When there is a recession and they lose power and are forced to maintain their paychecks. In the meantime, coworkers who WFH are foregoing raises. Subtle pressure.
I do feel sorry for all of the shops and restaurants near the business/city centers that are struggling without the return to work customers who provide the free lunches for the People paid by the managers.
Cubicles? No more! The flight to quality can be seen here in Boston. New offices are stunning, beautiful, and filled with amenities for employees. The old style office is dead. Boston is also seeing towers being sold for major discounts. You are correct that the businesses on the ground floor are struggling, waiting for the return of employees. Case in point, my lease expires in a few months, not renewing, after 34 years. This process will take another 2 years to sort itself out. It requires deep pockets to make a come back. A proper time to retire!
Here in Tucson, those 5-over-1 towers have been very unsuccessful.
The five floors of residential? For the most part, leased. Especially when the market is out of state college kids from families with beaucoup bucks.
The ground floor retail spaces? Mostly empty.
Matter of fact, I can show you one complex in a very popular retail district where the ground floor has never been rented. Ever. And this place has been open for residential and retail rental since 2022.
i think you and bobe are both right. with the exception of extreme introverts, i do think most people like offices. however, they like offices on their own terms. meaning they like the flexibility to come in a few days one week to get social interaction with colleagues, while retaining the flexibility to work remote on a friday if they are going out to dinner that night and want to save the time commuting.
if they normally go in 3-4 days a week, they want the flexibility to work remote for a whole week once in a whlie, if they are renting a beach or mountain cabin, for example.
people like offices, but don’t like being micromanaged, which is what “you better be in 5 days a week, and we’ll be watching you” is.
The smart money is staying out of this one. Lingering on the sidelines, their presence will be felt.
Think so ?
IMO. there is more downside to grossly overpriced capital assets that have run out of buyers.
Tomorrow, the white smoke from the Fed will confirm their decision that only brain dead players are unaware. The decision is no change in the FFR.
Which may be reckless in the sense that the Fed should raise rates by 25 bpt in anticipation of the inflation wave that is about to manifest itself.
I thought that I had seen everything until I read the headline that announced that Walmart supported American manufacturing.
jaysus
What global capital does and what it says are two very different things. Anyone that thinks the US is long term relevant as a market or as a manufacturing hub miss the demographics of this country(aging and declining birth rates) and the sheer size and growth of global South. Nothing like this happens overnight but been happening for a decade and of course US policy in 2018 on semiconductors,COVID, and others just sped all this up. Washington isn’t dumb enough to not know this but they certainly can control the narrative and not hard when last thing Americans want to do is face reality. Still time to right the ship, stop playing bully ball, and recognize this is not post WW II where there were geopolitical powers but not economic powers.
Laissez-Faire. Let this be a lesson.
The NPV of the purchase price of an elegant building often is the lowest cost of ownership.
Thanks Wolf.
Gee, if markets are left alone and not fiddled with by outside sources, they correct themselves. Whodathunk!
Tell that to Powell in September of 2019.
What a different world we would be living in had he not fiddled with the markets when rates spiked due to a “liquidity crisis.”
Like the current tariff policy, brilliant or madness ?
The tariff is a tax on corporate profits which I agree with Adam Smith who advised too never let a merchant develop the economic plan.
Corporations, the loud mouths that pay no taxes, boasting of their steroid like profit margins.
Someone has to pay for the society that enabled their customers.
@Happy1 before you buy any real estate make sure it is in a good (or at least “decent”) area. The “mid-market” area in SF has been rough for a long time (my entire lifetime). When I was in Junior High in the 70’s I remember taking the train up to the city from the Peninsula in the summer with a friend to buy firecrackers in Chinatown (that we would resell at a profit to Peninsula kids who were not allowed to take the train to the city and guy firecrackers from the guys in the Chinatown housing projects). We walked down 6th Street (two blocks from the 799 Market property and three blocks from the former Twitter/X HQ) and it was scary, My Dad said that 6th and Market was bad when he was a kid and in the 90’s when I moved back to SF it was as bad as ever, I recently read an article that said the Mid-Market area has a high concentration of fentanyl users. The guys that bet on gentrification in the area lost big. Better to stick with an area that you don’t have to “hope it changes” before buying a $140 million (or even a $40 million) dollar office building. When the (almost empty) mall down the street (at 865 Market) finally sells it will make the loss of 799 Market look tiny…
Meth is also a debilitating addiction. Luckily , growing up in the 60’s and 70’s we had the mantra, ” meth kills”.
In high school I was riding the horses so that they got some exercise and human contact. I do remember seeing programs on TV that showed the turmoil of civilization.
But that was sixty years ago. A different time.
As I recall, we all said “speed kills”–a play on words, since we were told the same thing about street racing. Of course, could have been regional variations, since the homogenization of the U.S. was just getting started.
It was “speed kills”.
In the Bay Area.
LOCATION,,, And timing of course might be relevant Apt guy:
In the late sixties and early seventies I would take the bus from Berzerkeley to the East Bay Terminal and walk to the ocean for relaxation.
Never had a problem of any kind…
Similarly, walked from the Lake all the way through Cicero on a Sunday morning in early winter of ’65, and all I saw were smiling faces…
Similarly many many places for eva!
Location AND timing…
My great grandmother would warn my grandmother and father against going below MacArthur in Oakland 70+ years ago. The ability of a bad neighborhood to outlive you is not to be underestimated.
Great article/insights. Most people don’t see it yet, but these buildings are aging dinosaurs. They require costly maintenance (which will be deferred), are energy inefficient, and difficult to modify for other uses.
This wave of sell downs is just the start of a long trend towards zero. Taxpayers might end up being responsible for teardown one day…another insignificant cost itself.
What do you need an office for? You have a computer or computers and AI. Each worker is connected to every other worker. The boss can easily track your every move. Be a digital nomad, no need of an office.
“If left alone, markets are good at sorting out a tough situation like this. The housing market could learn a lesson.”
Well, speaking from a policy standpoint, here’s the follow-up question. Will the Fed (ZIRP) & Congress (rent & mortgage relief) learn their lesson?
My guess is an emphatic, NO!
When all you have is a hammer, everything looks like a nail.
(Even if you are repeatedly driving it into your own head).
The cure for high prices is high prices…
Boom, boom, boom!
We’re set to lose over a million Baby Boomers this year, and with them, around 130,000 homes will hit the market.
It’s only going up over the next decade. By 2035, most Boomers will have outlived the average female lifespan.
So what does this mean for those red-hot Boomer markets?
Regarding market efficiency, for whom are they efficient? How can we know the price of a good? Is the idea of efficiency absurd in a market full of variables, many of them unpredictable?
Who makes good on all those under water cmbs that were sold off by the lenders to wallstreet on this latest shortfall at closing?
Please do not attack the messenger here, just answer the question.
1. there were no CMBS involved in this deal here.
2. No one “makes good” on office CMBS losses. Generally, CMBS are structured to where the lowest-rated slices of the securities take the first loss, and investors who hold these slices lose everything very quickly. But they were paid a higher interest rate over the years to take that risk, and they took that risk eagerly to make the extra money, and they lost. No biggie.
The top-rated slices rarely lose much money, but there were cases recently where even the top-rated slices took big losses, and in a few cases total losses. No biggie. That’s what investing is all about, you win some, you lose some.
CRE prices are known for being sticky and resisting declines until market pressures force prices suddenly lower. Once a couple of deals close at the new lower levels, this creates new comps that others use for pricing ideas, and in many cases this will unlock the market.
I have a listing for a very nice 27,000 sq ft manufacturing building that was appraised for $17.9m in the spring of 2022, shortly after completion. It is now on the market for $6.5m and we don’t have any takers at this level. I’m thinking that when it finally does sell, the sales price will be in the low $5s. The bank that took it back is not a happy camper.