A local developer appears to be doubling down on its bet on a turnaround for San Francisco's office market, one of the nation’s hardest hit by the COVID-19 pandemic.
Redco, based in San Francisco, has partnered with Bridges Capital, a family office also based in the city, to acquire 400 Montgomery St., a historic office building in the city’s financial district that was built in 1901 and survived the catastrophic earthquake that leveled the city five years later.
The 12-story building’s price tag of nearly $25.8 million was less than a third of the $77.5 million that sellers Intercontinental Real Estate Corp. and Harvest Properties paid for the 85,580-square-foot building in late 2019, just months before the COVID-19 pandemic transformed work patterns in San Francisco, hollowing out a downtown core that once accounted for most of the city’s gross domestic product and 40% of its jobs.
The building was 91% leased prior to the pandemic; that level has since fallen to 66%. San Francisco's vacancy rate of 22.9% remains well above the national average of 13.9%, while the picture is more bleak for the city's downtown, where vacancy rates top 30%, according to CoStar data.
Investors are watching closely for signs of a widely anticipated turnaround. Demand for office space has been ticking up this year with new leasing volume rising to 10.4 million square feet as of the end of the third quarter, according to CoStar. That’s a 50% increase over the 6.9 million square feet total of a year ago and the highest annual amount since 2020, according to a report from Nigel Hughes, senior director of market analytics at CoStar Group.
“The worst seems to be over,” Hughes wrote. “The pace of downsizing has slowed, and new leasing activity has increased.
Third buy
The 400 Montgomery buy marks Redco's third acquisition in San Francisco’s financial district since late 2023. The value-add investor and developer last year teamed up with several other parties to buy Harrington’s, a nearly century-old waterfront pub that shut down in 2020 but has since reopened. This past May, the firm partnered with San Francisco-based GCI General Contractors to buy 300 California St., a 119,000-square-foot office building roughly a block from 400 Montgomery, for $28.5 million, or $240 per square foot.
As office vacancy skyrocketed in San Francisco after the pandemic, and iconic office buildings have come on the market for valuations not seen in decades, recent deal activity shows investors have returned to the market in search of bargains.
Meanwhile, artificial intelligence companies have led a resurgence in leasing, with over 1 million square feet of new leases signed in the past 12 months, according to CoStar data.
Brokerage JLL listed 400 Montgomery, known as the Kohl Building, for sale this past spring. Former owners Nuveen and Harvest spent millions on improvements to the the lobby, common areas and restrooms, as well as the building's signature Baroque stone facade.
Redco said it plans to revamp the fifth and ninth floors of the building as furnished plug-and-play office suites. Rents will be in the low $50 per square foot range, with CBRE handling leasing efforts.