Paramount Group, the owner of top-tier office properties in New York and San Francisco, said its earnings will take a hit this year because of write-offs and lower rental revenue tied to leases signed by the now-closed First Republic Bank and Silicon Valley Bank.
JPMorgan Chase, which acquired First Republic Bank in May after California regulators closed it, has given back 116,716 square feet, or about a quarter of the 460,726 square feet, the bank had leased at One Front Street in San Francisco, Paramount said in a Friday filing with the U.S. Securities and Exchange Commission. JPMorgan has assumed the remaining 344,010 square feet.
The space the banking giant has given back largely represented offices that were not being utilized by First Republic. A majority of that space, or 88,236 square feet, was subleased to various other tenants under lease agreements expiring between 2023 and 2024, New York-based Paramount said.
"The headline was negative but better than feared," Morgan Stanley analyst Ronald Kamden said in a report.
Kamden said Paramount saw an overall 30,000-square-foot reduction in occupied space at the San Francisco building and a $5.05 million reduction in rent generated by the First Republic space this year versus the potential for up to $43 million rent reductions on a full-year basis. Paramount stock jumped about 15% to $5 in Friday afternoon trading.
Separately in New York, Paramount has terminated a lease with SVB Securities that covers 108,994 square feet at Manhattan’s 1301 Avenue of the Americas. SVB Securities is a unit of Silicon Valley Bank, which regulators shut down in March.
The landlord has since entered into a new lease with the entity buying substantially all of SVB Securities, Paramount said in the filing. The SVB Securities management team led by Chief Executive Jeff Leerink, and backed by The Baupost Group, said in June it agreed to buy SVB Securities with plans to rebrand SVB Securities as Leerink Partners.
The new transaction at 1301 Avenue of the Americas includes 68,183 square feet of space leased on a long-term basis, and 40,811 square feet on a short-term basis.
Because of the change in the leases, Paramount said its 2023 net income and funds from operations will be cut by a total of about $19.6 million, or 8 cents a share. Paramount said its income and FFO, an industry-recognized metric gauging changing real estate portfolios, will be impacted by $13.9 million in non-cash write-offs and $5.7 million in lower rental revenue related to the terminated SVB Securities lease and the space JPMorgan surrendered, minus rental revenue from the subleased space.
As part of its takeover bid, JPMorgan assumed the lease obligations for roughly 1.3 million square feet of office and retail space that First Republic claimed in its national real estate portfolio. It remains unclear what JPMorgan will do with some of the remaining space, which includes other properties that make up its corporate headquarters in San Francisco as well as offices in top-tier markets such as New York and Los Angeles.
JPMorgan already has a significant presence in all three metropolitan areas.
West Coast Impact
In San Francisco alone, First Republic's corporate footprint includes its headquarters at 111 Pine St., the One Front Street property, and 388 Market St.. However, with JPMorgan's 223,000-square-foot office nearby at 560 Mission St. that's slated to expire in September 2025, it could present an opportunity for consolidation, CoStar's National Director of Office Analytics Phil Mobley recently said.
JPMorgan has already notified nearly 1,000 of the Bay Area bank's employees that they would be laid off as the financial giant continues to integrate the failed lender into its own vast operations.
JPMorgan — already the nation’s largest bank prior to its First Republic takeover — offered positions to about 85% of First Republic's more than 7,200-person workforce for transitional or full-time positions. A majority of the regional bank's workforce has been based in the Bay Area.
What remains to be seen is how the two banks' in-office mandate will impact its future real estate footprint. Both First Republic and JPMorgan implemented requirements that have its corporate employees working from an office at least two days a week, even though JPMorgan CEO Jamie Dimon has been vocal about his distaste for remote work.
First Republic had been leasing space in the Paramount-owned 111 Pine for more than a decade, according to CoStar data. Neither JPMorgan nor Paramount responded to CoStar News' requests for comment.