KPMG may leave namesake tower after 20 years
When KPMG first leased space inside a 25-story office tower in downtown San Francisco, a year after the building opened for business in 2002, the company obtained naming rights, leading to the tower becoming widely known as the “KPMG building.”
One of the world’s four largest accounting firms, KPMG initially took 90,000 square feet at 55 Second St. in a 10-year contract, marking the second-largest office deal of 2003. It has since grown its footprint to span nearly one-third of the 380,000square-foot building.
But it now appears that the firm is considering ending its two-decade-long tenancy inside its namesake tower. The consideration comes amid continued turmoil in San Francisco’s office market, which is causing the city’s office rents — not long ago among the highest in the nation — to dip in the wake of the pandemic as more office space has become available than tenants currently need or desire.
KPMG’s lease for its office inside the Second Street tower, which spans roughly 125,000 square feet across eight floors, according to real estate information firm Costar, is set to expire at the end of this year, and already its space is being marketed as available for leasing on a direct basis, per a new listing obtained by the Chronicle last week.
KPMG declined to comment on its future real estate plans in San Francisco when contacted on Tuesday. Paramount Group, which is a partial stakeholder in 55 Second St. and manages the building, also declined to comment on the listing and the status of its lease with KPMG.
However, individuals with knowledge of the listing have confirmed that KPMG was on the hunt last year for a new, smaller office in San Francisco. Those individuals, who spoke on the condition of anonymity in order to protect business relations, say that the company was scouring the market for about 75,000 square feet of space, 40% smaller than its current digs. It is unclear whether that search resulted in the firm selecting a new location.
It is also not known whether the company remains in active negotiations to keep all or some of its space at 55 Second St.
KPMG cut nearly 2,700 U.S.based jobs in two rounds of layoffs last year, and it switched to a hybrid work model in the wake of the pandemic, allowing for flexibility around remote work.
KPMG’s potential exit from 55 Second St. — whether partial or in full — would come as another blow to San Francisco’s office market, which entered the New Year with a historically high office vacancy rate of close to 36%.
It could also potentially complicate the financial realities of KPMG’s landlords at 55 Second St., a joint venture that includes Paramount and Israeli insurer Harel Insurance.
When the joint venture acquired the KPMG building in August 2019, it was valued at $401.7 million, or roughly $1,057 per square foot. Paramount said in a 2019 annual report to its investors that the joint venture assumed an existing $137 million mortgage in connection with the acquisition, and “upsized it by an additional $50 million.”
That $187 million mortgage is slated to mature in 2026.
The building, which also counts software companies Intercom and Rippling among its tenants, is currently 86.7% occupied. Back in 2019, occupancy was at 95.7%.
“With a majority of in-place leases scheduled to roll through 2023, we see significant opportunities to increase revenue through our leasing efforts,” Paramount said about the building in its 2019 investor report.
But the situation in San Francisco changed dramatically just a few months after the KPMG building traded hands, when the coronavirus pandemic swept over the city in March 2020, leaving millions of square feet of office space available. Paramount will now have to compete for tenants who, in 2024, face a menu of space options at discounted rates.
“Their mortgage in their pro forma was based on a market that was healthy and that was projected to get even tighter and where they would be able to command rents north of $100 a square foot,” said San Francisco real estate veteran Tony Zucker, executive vice president at Dunhill Partners West. “Now it’s a down market, and it will be impossible for them to get the rents that they projected when they bought the building back in 2019.”
The landlord recently was in danger of defaulting on a $273 million loan for another one of its San Francisco office properties at 300 Mission St. that was scheduled to mature in October.
In 2019, tech firm Autodesk leased 117,000 square feet at 300 Mission for a brand new office that it opened in 2021, but then shut down just eight months later, citing a workforce survey that showed that Autodesk’s employees preferred remote work.
Other tenants in the building also moved to offload portions of their offices in the wake of the pandemic. Glassdoor had planned to open its new headquarters at 300 Mission in the fall of 2020, but the move was delayed due to COVID-19 restrictions. The recruiting website subsequently listed half of its new space in the building as available for subleasing.
In a third-quarter 2023 earnings report to investors, Paramount — which also owns 300 Mission as part of a joint venture — reported that it successfully completed a $232 million refinancing of its loan for the 655,000-square-foot property, which is now set to mature in 2026.
Similarly, Paramount and equity partners Blackstone managed to secure a loan extension on a $975 million loan for a 1.6 million-square-foot office property known as One Market Plaza in San Francisco, which was slated to mature in February, the Business Times reported last week.
Other owners of commercial and residential property in San Francisco, however, have been forced to surrender their properties as the weight of maturing debt became insurmountable, including the former owners of the San Francisco Centre mall; the Parc 55 and Hilton Union Square hotels; and Veritas Investments, which recently was forced to give up loans backed by large portfolios of apartments in the city.
“Their mortgage in their pro forma was based on a market that was healthy and that was projected to get even tighter ...” Tony Zucker, San Francisco real estate veteran