San Francisco’s postpandemic office reset is starting to take shape

San Francisco’s postpandemic office reset is starting to take shape

By Sarah Klearman – Staff Reporter, San Francisco Business Times

Roger Fields wasted little time placing 550 California St. up for lease.

After all, there was no shortage of space to play with. Wells Fargo, which sold 550 California to Fields’ firm, Peninsula Land & Capital, for $40.5 million in September, had once occupied the entire 355,000-square-foot office building. But it had been delivered to Peninsula Land & Capital completely vacant.

So Fields figured he might as well get to work. He even slapped his own direct phone line on online listings for the space.

Today Peninsula Land & Capital is advertising space at 550 California for $40 per square foot — roughly half of what office space in San Francisco commanded in the years before the pandemic. Fields, who says he anticipates owning the building for the long term, said there have been encouraging levels of tour activity in the building since he placed it on the market, though as of early December no leases had been signed.

“I’d love to have the building leased in a year. It’s a bit of a challenging market, so we’ll see,” said Fields, whose firm is planning to improve the building’s lobby, add ground-floor retail or restaurant space and add a new gym for tenants, among other amenities. His goal is to be “as flexible as possible to meet tenants’ needs in the market,” Fields said, offering things like competitive pricing and shorter leasing terms.


550 California St., San Francisco, April 2022

The reset club

Fields is among a handful of investors who have bought into San Francisco’s postpandemic office market in recent months and are now thinking about how best to reposition their assets. In the club alongside him: Presidio Bay Ventures, which bought 60 Spear St. for $260 per square foot in August; SKS Partners and Swig Co., which joined forces to snap up 350 California for $215 per square foot later that month; and Ridge Capital Investors, which bought 180 Howard St. for $255 per square foot last month. San Francisco investor Strada Investment Group is said to be in talks to purchase 201 Spear St. for a price in the upper $200s per square foot, but has so far declined to comment on that pending transaction.

What those buyers plan to do next with their buildings differs from firm to firm. But all have seized upon the same advantage: They bought into San Francisco’s office market at a significant discount to prepandemic values. That will give the wave of new buyers the flexibility to do things like offer lower rents than peers who are locked into prepandemic cost bases can sustainably muster, or invest the dollars they saved back into their buildings.

Of course, neither strategy is guaranteed to create demand for office space in San Francisco. But new owners placing buildings up for lease at lower rates could usher in what observers have been describing as an office market “reset,” opening the door to a new pool of prospective tenants who might have previously been priced out of San Francisco.

Swig CEO Connor Kidd said in an October interview that the firm, alongside partner SKS, was already in discussions with tenants interested in the building, which is approximately two-thirds vacant today. The partners, which brought on CBRE to market the building for lease, are looking to do deals between $50 and $60 per square foot.

Kidd declined to discuss details about pending leases in the building in October. But two sources familiar with the building who were not authorized to speak about it publicly said that as of late November Bridge Housing was nearing a deal to take a full floor, or roughly 16,000 square feet, at 350 California.

Swig declined to comment on the lease; Bridge, a nonprofit housing developer currently based out of 600 California St., did not respond to a request for comment, and details about its existing footprint in San Francisco were not available Friday. But as a nonprofit, it fits the profile of a tenant that stands to benefit from a reset.

‘Meaningful’ investments

Still, some buyers aren’t convinced that simply placing buildings up for lease at lower rates is the way forward.

“Right now we need to get going on our work,” Ridge Capital Investors managing director David Karol told the Business Times the day the firm’s purchase of 180 Howard St. closed. “The (former owner) State Bar maintained the asset really well — they spent defensive capital and maintained its good bones. We’ll spend offensive capital to try and create a better tenant experience.”

Karol declined to specify how much Ridge might invest.

Presidio Bay Ventures also has plans to invest an unspecified but “meaningful” amount of capital to transform 60 Spear St. into what the firm’s founder and CEO Cyrus Sanandaji described in an October interview as “the country’s first office resort.”

The firm over the next two years plans to add amenities like fitness space, a health spa, on-site concierge medical services, a rooftop bar and restaurant, event space — the list goes on. It’s a lineup you might expect to see in space belonging to a Google or Facebook, Sanandaji said, but now made available to tenants with a smaller footprint who want the best of what San Francisco’s office market has to offer.

Presidio Bay doesn’t plan to stop there: Sanandaji says the resort concept could gradually be expanded into a kind of urban campus, comprising three or four “similarly positioned buildings” in proximity to 60 Spear that the firm would buy in the next 12 to 18 months.

The point is to differentiate 60 Spear — and any other buildings Presidio Bay may add to its collection — from its peers in an office market with vacancy pushing 35%, Sanandaji said. He thinks the gap between trophy office product and commodity buildings will only widen in coming years: It could be five years from now or more before the tide of demand for office in San Francisco begins listing the ships of those properties.

Swig, though, has no problem with that timeline.

“We think it’s going to take a while,” said Kidd. “There’s no, like, ‘We have to do this one thing by tomorrow.’” Indeed, he said: The goal at 350 California is to get the building to about 80% leased in the next seven to eight years.

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