Deal in downtown San Jose office towers points to feeble market
SAN JOSE >> A high-profile office complex of two towers in downtown San Jose has been sold for a huge loss compared with its prior price in a deal that is a fresh reminder of the feeble state of the Bay Area office sector.
The property is 111 Market Square, an office center bought for $34.2 million, according to documents filed Thursday at the Santa Clara County Recorder's Office. The complex is located at the corner of North Market Street and West St. John Street.
The just-purchased office center, which totals about 325,200 square feet, was previously bought in 2019 by an affiliate of Rubicon Point Partners, which paid $141.4 million at that time, county real estate records show.
The buyer is an entity headed by George Mersho, the Shoe Palace chief executive officer. In recent months, Mersho led a different entity that bought a different downtown San Jose office property, also for far less than its prior purchase price.
The deals mean that Mersho's group paid a jaw-dropping 77% less than the price paid about five years earlier by the latest transaction's seller.
One of the towers in 111 Market Square is 12 stories high while the other is 10 stories, according to a marketing brochure circulated by CBRE commercial real estate brokers Chris Shepherd, Vincent Scott, Michael Grado, Matthew Taylor and Rochelle Imani.
In December, a different entity headed by Mersho paid slightly less thsn $23.8 million for an 11-story high-rise that totals 157,500 square feet. That price was about 70% below the $80.2 million that the seller paid for the tower in 2017.
The deals mean that Mersho has suddenly become a big-time player in downtown San Jose's commercial real estate.
The transactions, however, also make it clear that property values are slumping for office buildings throughout the Bay Area and that San Jose isn't immune from the weakness.
Here are other signs of a frail office market in the Bay Area:
• In the fall, a San Francisco office tower at 550 California St. was bought for $40 million, or a 75% discount from its prior price.
• Multiple other San Francisco office high-rises are being offered for sale, or have been sold, for a fraction of their previous values.
• In December, an Oakland office complex at 303 and 333 Hegenberger Road toppled into default on a $37.2 million loan.
• A downtown Oakland historic tower at 1440 Broadway was seized by its lender in July due to a $25.5 loan delinquency.
• Concord Corporate Centre, a two-building Concord office complex at 1320 and 1390 Willow Pass Road, was bought in December for $20 million, which was 68.5% below its prior purchase price in 2017.
Last week's deal involving the office towers in downtown San Jose suggests that office building prices have retreated below where they were nearly a decade ago.
These are some key benchmarks that demonstrate the deterioration in downtown downtown San Jose's office market:
• The latest price for 111 Market Square shows the Mersho-led group paid about $105 per square foot for the property. In 2019, the two-building complex was bought for $435 per square foot. In 2016, the property fetched a price of $199 per square foot. Put another way, the 111 Market Square complex is worth less than it was eight years ago.
• The price that Mersho's group paid for a tower at 303 Almaden Blvd. at $151 per square foot, is far below the building's value at the time of that tower's prior purchase in 2017. The 2017 deal was at that time a record high for downtown San Jose office buildings, $509 per square foot.
At the time of the prior deals for the two downtown San Jose office properties a few years ago, the city's downtown was flying high.
Real estate experts brimmed with confidence that tech companies and developers alike had finally spotted the opportunities and advantages of the urban core of the Bay Area's largest city.
In 2020, however, the coronavirus brought with it a plague of economic woes that torpedoed office buildings, hotels and retail properties.
Tech companies starting in 2022 began to chop Bay Area jobs in big numbers, a downsizing that also curbed their respective appetites for office space.
Office vacancies rose and rents flattened. Now, potential buyers and current owners of office buildings throughout the Bay Area are both engaged in fullscale expeditions to attempt to find the bottom of the region's reeling office market. It's unclear whether the intense endeavors have discovered the trough.
What is clear is the twobuilding 111 Market Square office complex that Mersho's group now owns is considered a top-notch Class A property, according to CBRE's marketing brochure.
Rubicon Point Partners undertook major upgrades to the lobbies and individual offices and also revamped a connecting courtyard in the property, which has groundfloor restaurant and merchant spaces.
The CBRE brokers also touted the location of the office center next to San Pedro Square.
“Market Square enables tenants to seamlessly transition from office hours to happy hour without missing a beat,” the CBRE brochure said. “Enveloped by bountiful urban living options, chef-driven restaurants, craft coffee cafes, happy hour hot spots and diverse cultural destinations, tenants can experience a hub of activity just steps from the office.”