A string of tenant exits has dealt a blow to a downtown San Francisco office tower over the past year, but the recent loss of one of the building's anchor tenants is especially painful as a hefty loan backed by the property is set to mature within the next several months.
Residential solar company Sunrun opted not to renew the roughly 43,500-square-foot lease for its corporate headquarters, marking the 10th tenant to move out of 225 Bush St. between October 2023 and February 2024, according to CoStar data. Those losses total upward of 120,800 square feet, a figure representing nearly one-fifth of its roughly 666,000-square-foot expanse.
Across the country, tenants are adjusting their real estate footprints in a manner similar to Sunrun by offloading space upon their lease expirations. In San Francisco, those givebacks have sent the city's vacancy rate to a historic high of 24%, the highest in the country, according to CoStar.
Companies in the downtown area have handed back a total of almost 2 million square feet more than they signed for over the past year, according to CoStar, not accounting for the roughly 3 million square feet of available sublease space that has yet to be filled.
Sunrun had been the second-largest tenant at the 225 Bush St. building. The tower is now less than half occupied, according to CoStar data.
That could present a problem for Kylli, the Silicon Valley landlord that refinanced the building in 2019 with a $350 million loan that is scheduled to mature in November.
Kylli has not missed any of its monthly loan payments, and its plans for the 22-story high-rise remain unclear. The Santa Clara-based investment firm did not respond to a request to comment from CoStar News.
Challenges Remain
The tower was fully occupied at the time the loan was issued, and its vacancy struggles have only been exacerbated since the loan was put on a watchlist in 2021.
The property generated about $40 million in revenue in 2020 when it was fully occupied, according to CMBS data. That figure fell along with its declining occupancy to about $24 million in 2023.
Sunrun has relocated to a smaller space at nearby 600 California St., where it signed a lease for about 14,800 square feet in late 2023. The company did not immediately reply to CoStar News' requests for details about its headquarters move but began listing the California Street address as its primary office in May.
Tenants collectively signed on for about 395 million square feet nationally last year, according to CoStar data, about 13% below the annual average reported in the years leading up to the pandemic's 2020 outbreak. What's more, those deals are about 16% smaller on average than those signed between 2015 and 2019.
While leasing activity in San Francisco is beginning to gain a bit of speed, the city still has a long way to recover from the record losses it endured as a result of the pandemic. Office attendance in the city is less than half of what it was prior to 2020, according to data tracked by security technology company Kastle Systems.
Yet several brightening spots indicate San Francisco's office market is on the cusp of a turnaround. Leasing activity is ticking upward, and AI companies such as OpenAI, Anthropic and Scale AI have signed some of the city's largest office deals since the onset of the pandemic in 2020.
Fewer tenants are deciding to dump their office spaces, according to a CoStar analysis, and the decline in rents over the past several years is beginning to slow.