February 19, 2010
Selling At A Loss In An Attempt To Make A Profit (Elsewhere)
Purchased for $245 million in 2005, the 730,000-square-foot south financial district twin-tower building at 303 Second Street is returning to the market with expectations of a $220 million sale price for the 90 percent leased building.
The key quote from TMG Partners CEO Michael Covarrubias:
“It’s a matter of what their basis is and what their alternative capital opportunities are,” said Covarrubias. “These buildings (like 303 Second St.) are not going to appreciate rapidly and there may be an opportunity to redeploy it and buy other distressed assets.”
Think that thinking might be playing a role in the recent return of previously unsold new construction condo units as well? More on this next week.
∙ S.F. building owners sell the best, keep the rest [Business Times]
∙ 303 Second Street [303second.com]
∙ Artani (818 Van Ness) Scoop Redux: Unsuspending Sales [SocketSite]
First Published: February 19, 2010 8:00 AM
Comments from "Plugged In" Readers
Is this a class A office building?
Posted by: flaneur at February 19, 2010 8:38 AM
Interesting. Near full SF office buildings not expected to appreciate quickly.
I'm guessing because the vacancy rate is so high in SF that there is no upward pressure on rents in near full building as there are no additional tenants trying to get into the building.
A telling statement on the state of SF's office market.
Posted by: Gil at February 19, 2010 9:08 AM
I read the biz times article and IMO it speaks to the desireability and strength of the SF office market. To wit: fully leased class A props are selling to foreign investors looking for bond like returns and long term appreciation. Local players have raised money and are seeking distressed deals- and not finding many good ones. Lenders are holding them.
Look it's all relative. The guys selling the bldg above are taking a reasonable 10-15% loss to redeploy capital elsewhere. Many other downtown markets are down 30-50%! It helps that there are foreign buyers looking to get a stake in SF when the market provides an opportunity to do so.
Given the tough economic climate, SF is doing fine. It's a primary reason I keep my investments (residential bldgs) here and don't go off to cheaper markets. And given that there are still numerous neighborhoods that are changing/gentrifying, the upside is still there for the right properties at the right location and right conditions. For talanted and experienced locals, willing to take calculated risks, I'd say this is still an active and exciting market to be in. Certainly I'm not bored!
Posted by: 45yo hipster at February 19, 2010 9:33 AM
No Surprise. They are selling before the building empties out or they have to cut rents to prevent that from happening.
"A majority of Bay Area companies think their revenues will grow in 2010 but plan to restrain hiring, as they grow through acquisition or squeeze more productivity out of existing staff, according to a survey released Thursday."
No hiring, no need for office space.
Posted by: tipster at February 19, 2010 9:34 AM
this is not an "A" building.
financial district rents are $33 PSF now in almost every 2009 q4 brokerage report.
This is where rents were (nominal) in the 1980's. 25 YEARS AGO. On adjusted terms office rents are back even farther in history. Point is that $400 PSF was a trophy building sale value back then.
Owners and lenders are holding their breath and hoping there is not a rush to market of say $2 BIL office properties in SF. when everyone concludes there is no good , soon recovery.
If tmg can get out of this now at $300 PSF its a very smart move, it could get a LOT worse.
Posted by: Louis at February 19, 2010 9:48 AM
"They are selling before the building empties out or they have to cut rents to prevent that from happening."
I agree. As the leases expire its a safe bet many won't be renewed and buildings like this could, in several years, be mostly vacant. Get out while you still can.
This is a bad omen for the SF market IMO.
Posted by: Gil at February 19, 2010 10:03 AM
is this area considered the financial district? i always thought FD was the highrises north of market st.
Posted by: condoshopper at February 19, 2010 10:20 AM
I consider south of market to the bay bridge and 2nd street east to be the RIncon Hill neighborhood and west of 2nd the Yerba Buena neighborhood ... If I keep saying it often enough, ??? :) Call it what ya want ... I'm calling it Rincon Hill.
Posted by: Jamie Whitaker at February 19, 2010 10:28 AM
This is about the same price range as 333 Bush . I guess the price is more about occupancy than location.
Posted by: flaneur at February 19, 2010 10:46 AM
I agree, this place is clearly SoMa, not FiDi.
I think this type of story is more of a Rorshach test than anything else.
if you are bearish on commercial RE then you see this story as a firm cutting its losses.
if you are bullish or neutral on commercial RE then you see this as a firm redeploying its assets.
I personally believe we have had massive overinvestment in CRE over the last decade, especially relative to likely GDP growth. Thus, I feel that CRE will be under pressure for some time. I therefore analyze this story as a firm getting out and minimizing losses.
class A vs non-class A is an important distinction of course, but we have too much Class A properties in the country as well (although they will clearly hold up better than non-class A properties).
Posted by: ex SF-er at February 19, 2010 11:16 AM
I used to work in this building. I don't know exactly what defines class A, but it was well managed and had a doorman. It didn't seem to have any trouble finding tenants, even during the start of the recession, and if they are fairly full then they didn't have trouble finding a tenant for the space my old employer vacated when they massively downsized and moved out.
Posted by: lyqwyd at February 19, 2010 11:45 AM
This is a class A building. Look at the building website linked above. Shows only 3 suites totaling 48,000 sf available. I'm not sure what entity keeps pushing the south fidi designation for this area. I was unsuccessful in finding a link to a Bloomberg story in yesterday's Chron that said SF has the largest loss of value in CRE of any major city in the country. Number was like 37% off vs. 24% national average.
Posted by: OneEyedMan at February 19, 2010 11:57 AM
OneEyedMan - do you recall the analysis as to why SF's CRE has dropped so much more in value compared to other major cities?
Posted by: Gil at February 19, 2010 12:56 PM
The article did not posit on causes. I do know a very high percentage of downtown SF CRE changed hands at peak prices between like '04 and '08.
Posted by: OneEyedMan at February 19, 2010 1:10 PM
"The article did not posit on causes. I do know a very high percentage of downtown SF CRE changed hands at peak prices between like '04 and '08."
I am wondering how the vacancy rate/available space in SF compares to other big office markets.
Also, prospects for future job growth - SF does not make the listings of top cities for most job growth this decade.
These two things may be factors also.
Posted by: Gil at February 19, 2010 1:15 PM
^ something sounds wrong with that...that sf cre fell the most in the nation. There are highrisers in many cities like Atlanta, Denver, etc that are in very bad financial shape. In SF there has been very few highrise fire sales, I believe only 1 or 2. And indeed as showcased in this thread, at a reasonable loss investors can sell to foreign money wanting to get into the sf highrise market. Try that in Atlanta.
Also the fact that lenders are holding on to props taken back means the banks believe in the props future values- hence the low # of actual firesales in the sf highrise market mentioned above. When you start seeing a dozen plus highrises available at fire prices (I.e. +/- $2-300/sq ft), then I'd get worried.
Posted by: 45yo hipster at February 22, 2010 9:40 AM
Posted by Louis: "this is not an "A" building." Wrong. Class A. Very unique to have 40,000 sq ft of contiguous office space on one floorplate as well.
"If tmg can get out of this now at $300 PSF its a very smart move, it could get a LOT worse."
TMG does not own this building, chief.
There is a lot of demand for this building, there have been recent news leases signed in last year or two from what I hear. I do agree that rents will continue to soften until the end of the year.
Posted by: Soma at February 22, 2010 11:17 PM