A 25-story vacant building in downtown San Francisco sold for $111.3 million, marking the biggest office deal of the post-pandemic era as investors bet on the artificial intelligence boom to rescue the city’s beleaguered commercial real estate market.
Developer DivcoWest and investor Blackstone Real Estate joined forces to purchase the 420,000 square foot property at 300 Howard St. in the city’s South of Market Street neighborhood, with plans to attract artificial intelligence tenants.
DivcoWest owns another building across the street, 301 Howard St., and is hoping to market the stretch as “AI Alley,” said the company in a press release, with renovations that aim to reimagine the early 2000s-era office tower as a “high performance hub built for today’s most ambitious teams.” To that end, it plans to install an array of “hospitality-inspired upgrades designed to fuel connection, creativity and next-gen workplace experiences” including a conference center, elevated lounge spaces and fitness and wellness centers.
Observers noted that the building was the first property this year to sell for more than $100 million. But the fanfare surrounding the deal is notable considering the state of the city’s office market just a few short years ago. In late 2019 — at the height of San Francisco’s tech-driven real estate boom — DivcoWest acquired a 49% stake in the same building for $186.2 million, a sale price of $900 per square foot, compared to around $264 per square foot the firm just paid.
Over the past half decade, San Francisco has seen its office vacancy rate rise from the lowest in the nation to the highest as a perfect storm of COVID-19 pandemic lockdowns, remote work and layoffs by technology companies caused tenants to downsize at record levels. As a result, San Francisco’s formerly flourishing Financial District became dotted with half-empty office buildings and half-deserted streets, while owners struggled to keep hold of their properties as the cost of debt increased and values fell.
Until well into last year, larger institutional investors like Divco West and Blackstone made it clear they were committed to waiting out San Francisco’s bleak office market from the capital market sidelines, as job cuts across Silicon Valley's largest tech companies, coupled with lingering flexible work policies, kept office leasing levels low and vacancy rates high compared to their pre-pandemic levels.
“We are big long-term believers in San Francisco," David Levine, Blackstone’s co-head of Americas acquisitions, said in a statement.
Gradual comeback
But the Bay Area’s commercial real estate market has shown signs of a gradual recovery in recent months, especially in the leasing market. Over the last six months, leasing volumes have reached their highest levels since early 2022, according to CoStar. The surge has largely been fueled by expansions from tech companies, especially in the artificial intelligence sector, driving an increase in demand for new office space.
In the San Francisco Bay Area and other tech-concentrated hubs across the United States, AI companies are scooping up large blocks of both sublet and direct space, a trend many stakeholders say is critical in rebuilding occupancy. What's more, a major underpinning of the AI-driven real estate flurry is that many companies have implemented firm in-person mandates, adding to landlords' increasing optimism that the demand for office space will stick to an upward trajectory. Last year alone, AI office leasing in the San Francisco Bay Area reached about 2.4 million square feet, according to CBRE data, more than doubling companies' existing footprints.
In the meantime, a growing number of high-profile local investors are snapping up discounted properties in downtown San Francisco amid a growing consensus that the city is in the midst of a gradual recovery that is building momentum. Earlier this month, LendingClub Corp., a digital banking platform, finalized its bid to acquire the 21-story tower at 88 Kearny St., with plans to house its future headquarters there. The $74.5 million purchase was just above the roughly $66 million that seller Teachers Insurance and Annuity Association of America, or TIAA, paid for the property in 1999.
“Investors see a historic opportunity to acquire assets at discounted prices,” said CoStar Senior Director of Market Analytics Nigel Hughes. He noted that per square foot purchase price paid by Divco West and Blackstone for 300 Howard St. “is among the lowest for a four-star building in San Francisco and reflects the low building occupancy.”
DivcoWest is clearly betting on San Francisco’s AI wave. Last year, it leased the entire building at 550 Terry A. Francois Blvd. in the city’s Mission Bay neighborhood to OpenAI, the maker of Chat GPT. In November, the company paid more than $222 million through a joint venture with Norges Bank Investment Management, the investment arm of Norway’s central bank, to purchase Sand Hill Commons, a two-building office campus in Silicon Valley surrounded by the headquarters of some of the world's largest tech companies.
The building formerly known as 199 Fremont St., which was completed in 2000, is located just east of the complex housing Salesforce Tower, the tallest building in San Francisco. It has housed startups over the years such as StubHub, Fitbit, and eBay, among others.
“300 Howard sits at the heart of one of the most innovative commercial corridors in the country,” said Gregg Walker, DivcoWest’s president of real estate asset management, in a press release Tuesday.