Now there’s a new wave of investor-funded tenants in town that are swimming in cash: AI companies.
By Wolf Richter for WOLF STREET.
What’s an older office tower in San Francisco worth? 75% less than in 2019, per the latest transaction in San Francisco, once the hottest and most overpriced office market in the US. And there have been quite a few of those kinds of transactions over the past two years. Everyone knows the drill.
Back in June 2019, at about the peak of San Francisco’s office market, e-cigarette startup super-unicorn Juul Labs, on the eve of its collapse, purchased the entire 29-floor 360,000-square-foot office tower at 123 Mission St., in San Francisco, for $397 million, for its future headquarters and planned to grow into it over time. The tower was built in 1987. Square Mile Capital Management, which is now Affinius Capital, provided a $220 million loan to fund the purchase.
At the time, Juul was swimming in money and had a sky-high valuation because it was going to change the way people smoked and expand the number of people who smoked: A few months earlier, Altria Group, the cigarette maker, had plowed $12.8 billion into the startup for a 35% equity stake in a round of funding that totaled $13.6 billion and gave the startup a valuation of $38 billion.
Then Juul got tangled up in all kinds of legal problems, and its business collapsed, and its valuation collapsed. Altria ended up writing off most of its investment. What was left of Juul departed San Francisco in a huff. The office tower began to empty out and today is 87% vacant. And Juul has been trying to sell it, but couldn’t, and likely stopped making payments on the loan.
Now New York-based Madison Capital and PGIM, the investment arm of Prudential Financial, reached a deal with the lender to purchase the debt on the building, which will allow them to take possession of the building via a foreclosure or a deed in lieu of foreclosure, according to the San Francisco Chronicle, citing sources.
The price of the debt, and thereby the building, was in the “low $90 million” range, according to the Chronicle, citing Madison’s head of acquisitions.
That price represents a discount of about 75% from the transaction price that Juul had paid in 2019.
Even as these kinds of transactions at discounts of 60% to 80% continue to occur in San Francisco, there is a fresh wave of office-tower tenants in town, despite all the talk about tech layoffs: AI companies, which are not swimming but drowning in money.
In January, Anthropic leased the entire 25-floor, 420,000-square-foot tower at 300 Howard St. and plans to move into it in 2027 and grow into it over the long term. So let’s keep the circular AI dollars spinning for as long as possible, in the hope that some of these largely empty office towers can find some investor-funded tenants?
In case you missed it: Construction Spending on Data Centers, Factories, Powerplants, and Office Buildings: Boom, Bust, and in Between
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I just keep wondering about the collapse of the tax base. Does SF have a viable plan?
Based on my experience, CA’s state and cities (maybe mostly the cities) seem to not see their policies as failures. The only failure is their policies weren’t done enough.
It’s why they always ask for more money when they fail to meet obligations with previous allocated monies.
Luckily, they are a beautiful coastal town with a global port and amazing surroundings, and that can recover much better than some rust belt city
There is a huge ugly deficit (of nearly $1 billion over two years) in the gigantic ugly ever-ballooning budget. The mayor ordered some staff cuts that wouldn’t be nearly enough to eliminate the deficit. But everyone else seems to be resisting any cuts. Long-term, the City is encouraging the conversion of some office properties into residential, and has made a variety of changes to make that easier, but conversions are hard and take years. The problem with the budget is that SF has always had way too much money. it just sloshes around everywhere. That breeds decades of budgetary excesses into City Hall that no one can stop.
Enlightened libertarian,
Nope.
That shipped sailed.
But SF is Wolfs hometown. He would know for sure.
Petaluma is offering Wolf refugee status. Will he join me in Petaluma?
Only time will tell.
More importantly, did the ENTIRE Clown Altria senior management and Board of Directors get the boot from wasting $12.8 Billion on Juul and ultimately writing off the investment? Probably not! That has to be one of the largest VC type investment failures in Silicon Valley history. Juul must have had some great salesmen to dupe Altria. Did investors file a lawsuit against Altria management as I don’t recall hearing anything about that disasterous investment? Altria management should be ashamed….
At first I thought this story was another Greek tragedy, but then I researched what Juul is….
Now I know it’s a happy story where the villain gets what’s coming to it.
Then again, I don’t smoke cancer sticks.
There seems to be a number of companies operating that seem like they would not have been allowed 20 years ago. Smoking and gambling companies are making a fierce comeback in the disguise of mobile convenience and get brownie points for market share “disruption”. Although that is a moral issue for a different site.
The SF market does seem to be hiding its CRE implosion relatively well. You would never know that the CRE market is churning based on the foot traffic.