Strada Investment Group has formally assumed ownership of 201 Spear St., the latest San Francisco office building to trade hands via a deed in lieu of foreclosure process — and at a considerable discount to its prepandemic value.
The San Francisco developer and an unnamed equity partner acquired a $125 million loan originated by lender PGIM Real Estate Finance for Southern California-based investor KBS, which bought 201 Spear for $121 million in 2013. KBS defaulted on its loan this past November after failing to make its monthly payment.
Strada and its partner bought the debt on the building for $67.25 million, according to a source with direct knowledge of the transaction. KBS then handed the keys to 255,000-square-foot 201 Spear to Strada in lieu of beginning the foreclosure process. The two-part transaction closed Tuesday.
The all-cash deal values the 18-story 201 Spear at roughly $260 per square foot.
It is the latest property to trade hands at what appears to be the going postpandemic rate of between $200 and $300 per square foot — a fraction of what KBS bought the building for more than 10 years ago, and a significant discount from its prepandemic value. The deal is among the largest to close since San Francisco office properties began trading again this summer after roughly two years of extremely limited investment sales activity.
Financing for office deals in postpandemic San Francisco has been hard to come by, prompting buyers like Strada to move forward with all-cash acquisitions. Sources told the Business Times at the end of last year that 201 Spear was expected to trade hands for roughly $70 million, and said at the time that that price tag could limit the pool to prospective buyers capable of doing an all-cash deal that size.
Strada Founding Partner Jesse Blout said Wednesday the firm, which is a tenant in the building, was drawn to the property because of its location and its quality. KBS also kept the building well-maintained, he said, meaning Strada’s immediate, necessary capital expenditure will be minimal.
“We felt like even before Covid, the market was more of a momentum market than a value market,” Blout said of San Francisco office properties. “People were investing on momentum rather than value. At the basis we are buying, this is a true value play.”
The lower basis will enable Strada to offer tenant improvements and potentially more attractive rental rates — things landlords locked into a higher, prepandemic cost basis often cannot sustainably offer. Landlords with lower costs are contributing to what observers are calling a “reset” of San Francisco’s office market, wherein those lower rental rates or amenities offered by the new cohort of ownership are able to attract a new subset of tenants to take space in the city.
The Business Times reported in December that housing nonprofit Bridge Housing was nearing a deal to take a floor at 350 California, which traded hands for roughly $200 per square foot over the summer; that lease, for 16,000 square feet, was formally announced this week, marking one of the first such deals made at a “reset” office property.
KBS warned investors last summer it was considering handing 201 Spear back to its lender in light of the property’s deflating occupancy rates. Occupancy, which held at 95% through September of 2022, dropped to 65.4% in the spring of 2023, KBS reported in regulatory documents filed with the Securities and Exchange Commission.
KBS said at the time it was concerned WeWork, which leases some 65,000 square feet in the building, might terminate its tenancy there, noting such a termination would drop the building’s occupancy rate even further. WeWork, which has been meticulously cutting away at its leased portfolio amid Chapter 11 bankruptcy proceedings, saw Google, its largest client at 201 Spear, depart the building this fall. Blout said Wednesday conversations with WeWork are ongoing.
The building’s occupancy rate is currently hovering around 40%.
KBS acknowledged the deed-in-lieu transaction in documents filed with the SEC this month, saying it had begun the process with PGIM at the end of last year. KBS engaged in a deed-in-lieu proceeding that gave PGIM the ability to transfer ownership of the property to itself or to a third party, per regulatory filings. In exchange, PGIM agreed not to pursue KBS for any difference between what it could sell the building for and what KBS might still owe on its loan.
Deed-in-lieu transactions — essentially a lender-facilitated sale in the case of 201 Spear — are cropping up with increasing frequency in downtown San Francisco. The transaction allows lenders and borrowers to circumvent the sometimes costly and time consuming foreclosure process. Deed-in-lieu transactions are also not subject to transfer tax, a tax levied by San Francisco on real estate transactions, because the tax applies only to the transfer of real property, not mortgage debt or foreclosure of properties tied to debt.
