A lender is taking over a large Silicon Valley tech campus in the latest sign that even some of the highest-priced office markets aren't immune to the evaporating valuations taking place across the country.
An affiliate of KKR Real Estate Finance Trust is seizing the vacant 449,000-square-foot campus at 350-380 Ellis St. in Mountain View, California, home to Google's headquarters. KKR pegs 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.
Office values across the United States have decayed by as much as 15% since 2021, according to a CoStar analysis, with larger, trophy properties falling at a rate nearly twice that as the buyer pool for those types of buildings has dwindled.
California's Silicon Valley is home to some of the priciest office markets in the state, with Palo Alto, Menlo Park and Mountain View garnering the most expensive asking rents in the state, ranging from $93 to $71 per square foot on a monthly basis. Still, remote work trends and downsizings from technology tenants have helped pull down office valuations since 2020.
TMG Partners, based in San Francisco, and Goldman Sachs are handing over the property through a deed in lieu of foreclosure, a method growing in popularity in recent months as owners face the financial burden of shrinking tenant rosters and high interest rates.
At the time of the 2021 deal for the campus, NortonLifeLock signed a seven-year deal in a sale-leaseback transaction totaling 143,000 square feet, according to reports. The tech security titan has since listed the entirety of its space for sublease, according to CoStar data.
Challenging Conditions
KKR issued a $363 million loan to TMG and Goldman Sachs at the time of the acquisition, according to documents filed with the Securities and Exchange Commission.
The campus is situated about three miles from Google's homebase; the tech titan's presence has contributed to higher office rents in the area.
The giveback is somewhat of a rare occurrence for the Silicon Valley city, though New York-based TPG Angelo Gordon recently handed back the keys to a nearby property at 515 and 545 North Whisman Rd., a 153,000-square-foot office in Mountain View.
The city's office vacancy rate of 20% is higher than the 8% figure seen two years ago, in part due to givebacks from Google and Meta as tech companies adjust their space needs in the face of "challenging economic conditions," according to a CoStar analysis.
More U.S. properties are being surrendered through deeds in lieu of foreclosure, a voluntary process unlike regular foreclosures that involve an involuntary seizure, according to previous reporting by CoStar News.
Office buildings made up 43% of all nationwide deed-in-lieus in the second quarter, according to CoStar data. That compares to a 20% average for all of 2022.
The increase comes as property owners are being hindered in their ability to refinance maturing loans as rising interest rates have boosted borrowing costs. Other owners simply are not willing to keep pouring money into properties they see as poor performers.