BH Properties Deal Reflects Weaker Property Valuations
A Southern California investor appears to be extending its Bay Area buying spree by closing in on a discounted deal for an office in one of the nation’s hardest hit real estate markets in the wake of the pandemic.
Los Angeles-based BH Properties intends to pay $13.5 million for a 111,000-square-foot office in downtown San Francisco at 989 Market St. in a deal expected to close next week, people familiar with the transaction tell CoStar News. That price would mark a nearly 80% discount to the $61.2 million that the office sold for about a decade ago, when ABS Real Estate Investments acquired the site. The deal hasn’t closed so nothing is final.
Office valuations are declining across the country as investors grapple with higher interest rates and low tenant demand. Properties in the U.S. West have been among the hardest hit in recent years, with dense California markets such as San Francisco and Los Angeles dealing with a reduced workforce.
Valuations for office buildings in the U.S. West are off about 5.1% in the past year, according to CoStar Group’s most recent Commercial Repeat-Sale Indices. The report showed the region posted the second greatest price declines during the second quarter, with office valuations off 1.8% from the first quarter, slightly better than the 1.9% decline seen in the U.S. South.
Across all property types, the West came in last in terms of second quarter price performance. Countrywide, the office sector was the hardest hit during the second quarter with valuations off 2.9% from the prior quarter and 8.1% from the same quarter last year.
The downtown San Francisco office is the latest to showcase dwindling price devaluations in the region; San Francisco offices lost nearly 10% in value in the last year, trailing only San Jose for the largest decline in California, according to CoStar data, and ranking among the hardest hit in the country.
Diminishing Valuations
The largely vacant office counts just Blick Arts Materials as a tenant, according to CoStar data; the company occupies 13,000 square feet.
The deal, reported earlier by the San Francisco Chronicle, marks BH Properties’ third acquisition in the Bay Area in the past year. Last June, it shelled out $65 million for Oakland’s 60-acre Holy Names University campus, and two months later, it paid roughly the same amount for the 200,000-square-foot Anchorage Square shopping center in San Francisco. The mall last sold for $95.5 million in 2004.
BH Properties paid about $123 per square foot for its latest Bay Area buy, lower than some of the discounted office deals to take place in San Francisco in recent months.
Last week, England-based Wellington College paid $23.5 million, or $371 per square foot, for 99 Rhode Island St. with plans to turn Airbnb’s former headquarters into a new school. Earlier this year, New York Life Insurance bought the 70,000-square-foot 410 Townsend for $22 million, or $278 per square foot, according to previous reporting by CoStar News.
San Francisco’s vacancy rate sharply rose in the wake of the pandemic and it remains at a historic high of 22.2%, largely caused by remote work trends and technology tenant reductions. That, coupled with higher interest rates and a decreased lending appetite for offices across the country, has served as a downward force on office values.
In a recent example, a national lender is taking over a vacant 449,000-square-foot campus at 350-380 Ellis St. elsewhere in the Bay Area in Mountain View, and pegged the valuation of the office campus at nearly $121 million, a far cry from the $357.5 million price that the property sold for in 2021.
Source: Costar
