San Francisco Chronicle - (Sunday)
S.F. to take over ex-tech HQ in Mid-Market
For months, the city of San Francisco has been talking about lowering its real estate costs amid dipping office values and rents in the city. It may now be happening.
Landlord Hudson Pacific Properties has agreed to a discounted, long-term lease and the potential future sale to the city of a roughly 1 million-squarefoot office building it operates at 1455 Market St.
The 22-story office tower, which contains an eight-story podium at its base, previously served as the headquarters for ride hailing behemoth Uber and for fintech Block Inc., formerly Square.
No recent real estate deals capture the current dynamics of San Francisco’s changing office market quite like this deal in the Mid-Market neighborhood. And it may not be the only one. The city has negotiated another deal in the building at 1145 Market St., near Civic Center, and expects to formally announce it next week.
The Mid-Market area was once a burgeoning tech hub known for the 2011 “Twitter tax break,” which erased the 1.5% payroll tax for companies that moved into certain MidMarket buildings and effectively drew major firms like Zendesk, X (formerly Twitter) and others. More recently, Mid-Market has been associated with the city’s economic duress in the wake of the pandemic.
Tech firms that once paid top dollar for office space have been steadily reducing their physical exposure to San Francisco real estate, particularly in downtown and Mid-Market, due to remote work, and landlords are increasingly willing to cut a deal to fill their spaces.
Starting in May, more than 157,000 square feet of the building will be leased to the city, according to a resolution introduced this week by Board of Supervisors President Aaron Peskin, which offers insight into the deal and is currently before the city’s Budget and Finance Committee for approval.
According to the pending lease agreement, the city will initially lease a portion of the tower’s seventh floor, or roughly 51,790 square feet, and all of floors 12, 13, 15 and 17. The term of the lease is 21 years and comes with two fiveyear renewal options.
The lease agreement states that the base rent will start at $40 per square foot and escalate to $72 per square foot in year 21 of the lease term. However, the deal provides the city with a number of concessions, including an allowance for tenant improvements of $100 per square foot, that will lower the city’s initial costs. Additionally, the city may acquire furniture left behind by the building’s departed tech tenants for just $1.
In a March 25 letter to the Board of Supervisors, Andrico Penick, who heads the city’s real estate division, wrote that the lease deal is meant to “solve” the immediate space needs of several city
departments that are currently located at 1155 Market St., an 11-story building across the street from the United Nations Plaza.
Citing high rents, the Board of Supervisors, in September, rejected a lease renewal at 1155 Market, which is owned by the nonprofit LightHouse for the Blind and Visually Impaired, and over the years has provided space to a number of city departments. The building currently counts the Mayor’s Office of Disability, the Department of the Environment and the Office of the Treasurer & Tax Collector among its tenants.
At the time, city officials said that the lease rejection at 1155 Market was not motivated by a desire to leave the area, but rather part of a strategy to consolidate its current office leases and take advantage of the pandemic-induced market downturn, which has seen office vacancy surpass 36% this year and office rents soften significantly.
Peskin said that the lease renewal that the Real Estate Department proposed last year was slightly above market-rate and based on a previous appraisal that did not reflect changing market conditions.
“It caught my attention — the market is trending the other way,” said Peskin. “I thought that we needed to set an example that we are not captive to the Mid-Market office world — we have a lot of vacancy downtown and we can talk with our feet. As a result, we are now getting $40 per square foot at 1455 Market.”
The departments that will be displaced from 1155 Market St. would join the San Francisco Municipal Transportation Agency and the San Francisco County Transportation Authority at 1455 Market;
these city agencies already lease space inside the tower.
The lease agreement shows that the city also has an option — which it must exercise by year-end 2027 — to expand its footprint in the building by leasing the sixth floor, which spans 131,534 square feet; the fourth and fifth floors, which span 97,718 and 99,041 square feet respectively; as well as a 66,056-square-foot sublevel floor.
Additionally, a purchase and sale agreement has been negotiated between Hudson Pacific and the city’s Real Estate Department that would allow the city to purchase the 1455 Market office tower by Dec. 31, 2027. The sale can be executed so long as the city has leased 400,000 square feet in the building by that date, Peskin’s resolution states.
Per the agreement, the purchase price will be set at fair market value and will be determined by an appraisal, but may not fall below $200 per square foot, according to a contract approval notice filed with the city’s Ethics Commission.
“The building is nearly empty and given current market conditions, the Lease Option and Purchase Option provide a unique opportunity for the City to meet its short term cost savings goals, as well as its long term goal of consolidation through leasing or purchase,” Penick said in his March 25 letter to the supervisors. Penick could not be reached for comment on Thursday.
“We’re pleased the City is looking to stay in MidMarket and has interest to further expand its presence at 1455 Market. As a long-term owner and operator of properties in San Francisco, we continually invest in our assets, as well as the surrounding communities, to support the City’s ongoing revitalization,” said Shawn McGarry, executive vice president for Hudson Pacific’s Northern California office operations.
Peskin confirmed Thursday that a separate lease deal has been in the works at 1145 Market St., which is located several blocks east of Hudson Pacific’s building and adjacent to 1155 Market St., the LightHouse building from which the city is now decamping.
The 1145 Market building is a 13-story, roughly 160,000-square-foot office tower known as One Trinity Plaza, and is owned by Trinity Properties. The lease negotiated there is for roughly 120,000 square feet, at a cost of about $30 per square foot.
Trinity could not immediately be reached for comment Thursday.
Among the city departments that will benefit from the new lease is the San Francisco Law Library, which is already located at 1145 Market, but will see its tenancy extended and its real estate costs drop by 49%, according to Peskin.
Peskin told the Chronicle on Thursday that he expects to formally introduce a legislative package seeking the city’s approval of the 1145 Market deal next week.
The deals represent a big win for the city, but also a boost for the MidMarket neighborhood. The Twitter tax break resulted in a 600% increase in business tax revenue in the Mid-Market area between 2010 and 2013. But an exodus of tech tenants from the area began before the pandemic, and has been exacerbated in its wake as companies began implementing flexible work policies that do not require their employees to attend a physical office five days per week.
That includes X (Twitter), the namesake of the tax break, which has listed significant portions of its space for sublease at its 1355 Market St. headquarters.
Amid waning demand for office space, building owners are seeing values plummet and are increasingly struggling to keep up with their debt payments in recent years — some have been forced to surrender the keys to once highly valuable properties back to their lenders.
“It’s a win-win,” said Peskin. “We are doubling down on Mid-Market. We have the opportunity to buy an entire building. And there are going to be thousands of city employees in the area — this is a boon to Mid-Market.”
“We are doubling down on Mid-Market. We have the opportunity to buy an entire building ... this is a
boon to Mid-Market.”
Board of Supervisors President Aaron Peskin