Luxury real estate developer Michael Shvo's $1 billion bet on San Francisco's recovering office market is beginning to pay off. His trophy Transamerica Pyramid tower has landed its largest deal since completing the first of several overhauls planned for the iconic skyscraper.
Global law firm Morgan Lewis will add its name to the Pyramid's tenant roster following a 123,000-square-foot lease it signed to relocate its longtime San Francisco office. The deal, spanning seven complete floors at the 600 Montgomery St. tower, echoes a sentiment unfolding across the country among tenants eager to snap up space in the highest-quality properties available.
And more importantly, those tenants are proving themselves willing to pay a significant premium for it.
“Attracting one of the world’s most respected law firms further validates Transamerica’s place as the leading commercial building in San Francisco,” Shvo said in a statement to CoStar News, adding that the "remastering of the iconic asset" has helped boost its leased rate past 80%.
The relocation will result in a downsizing for Morgan Lewis, which currently occupies just shy of 150,000 square feet at One Market Plaza along the city's Embarcadero. The law firm has leased space at the 1.6 million-square-foot complex for more than two decades, according to CoStar data, and is the largest tenant to anchor the Spear Tower building, one of two at the Blackstone- and Paramount Group-owned property.
Morgan Lewis is preparing to relocate to its new Transamerica space sometime next year.
The 48-story tower is an "iconic building in San Francisco,” said Brent Hawkins, a managing partner for the law firm’s San Francisco office. He said the firm's decision to relocate to the Pyramid highlighted its “strong investment in this city’s dynamic future.”
Sky-high rents
That investment is particularly notable given the Pyramid's position as one of the most expensive office properties in the country.
Rents at the tower start at about $115 per square foot for levels near the Pyramid's base and work their way up to about $300 per square foot at the top, making it the third priciest office building in the United States behind only the One Vanderbilt and 425 Park towers, both in Manhattan. By comparison, rates at Morgan Lewis' soon-to-be-former One Market Plaza office average about $58.50 a square foot, according to CoStar data, slightly above the $51 per square foot average for the rest of the city.
Financial terms of the 20-year lease agreement between Morgan Lewis and Shvo were not publicly disclosed.
While there was some skepticism over whether Shvo's hospitality-focused renovations would be able to command those kinds of rates — especially given San Francisco's challenges in recovering its pre-pandemic momentum — the latest deal with Morgan Lewis solidifies the notion that tenants will pay up for space that will not only help them recruit and retain talent but also get employees to want to come to the office.
"This building has seen rents double and triple since we bought it," Shvo said of the $650 million acquisition he and a group of partners closed in October 2020. The deal included the 523,000-square-foot Transamerica Pyramid tower, the 191,142-square-foot office building at 505 Sansome St., a future development opportunity for an existing office building at 545 Sansome St. and an adjacent land parcel at 517 Washington St.
After spending about 18 months and $250 million renovating the Pyramid, the neighboring Sansome Street building and the Transamerica Redwood Grove — the plaza that links the entire center together — the overhauled Pyramid made its debut last September with new, tenant-exclusive amenities such as a top-floor sky bar and lounge and a wellness center, as well as public additions including multiple dining concepts and a reopened park.
“The extensive investment to remaster this global icon has been a catalyst for the resurgence of downtown San Francisco," Shvo said, adding that it also "reflects our deep commitment to the city’s success."
Gradual healing
After years of substantial move-outs and extended layoffs that left the national office market bruised and battered, some of the country's largest office landlords are pointing to escalating return-to-office mandates and shrinking availability of premium space as a backbone for its gradual recovery.
While the overall health of the office market falls into two distinct camps — a stable and strengthening premium segment versus a struggling and financially stressed lower-tier one — the companies that are signing deals are focusing on the best space available and have proved willing to pay for it. Asking rents for premier office space is more than 50% higher than the rest of the market, up from the 40% premium landlords were able to command three years ago.
All of that is translating into an increasingly positive outlook for San Francisco, one of the markets hit hardest by the impacts of the pandemic, largely due to its longstanding dependence on the tech industry.
The city continues to face one of the nation's highest office vacancy rates due to pandemic-induced headwinds. Property valuations have plummeted in recent years, largely because San Francisco has been more affected by flexible work than any other market in the U.S., according to a CoStar analysis.
Tech companies such as Meta, Salesforce, Dropbox and Pinterest that had previously fueled the regional office market have collectively dumped millions of square feet over the past half-decade, driving San Francisco's availability rate past 26%, according to CoStar data.
Yet with large companies such as Gap, JPMorgan Chase and Salesforce asking employees to come in more regularly, the gradual boost in foot traffic has been enough to fuel a sense of optimism that the city is on the cusp of a rebound.
Already, leasing activity has been incrementally rising over the past six months, according to CoStar data, hitting its highest volume since 2022.
“This is one of the greatest cities in the world,” Shvo said. “You can’t write this city off.”