To compete with more attractive competitors in the city, real estate company Colliers announced last week that it would move its headquarters from a secluded building in SoMa to One Market Plaza on the edge of the waterfront.
When the building is installed on the 13th floor of the Stuart Street Tower next year, Colliers employees will have unobstructed views of the Bay Bridge. Over the past decade, One Market Plaza has been considered an upscale, prestigious destination, attracting companies such as Google, Morgan Lewis, and Visa.
Currently, the 1.6 million square foot office complex is more than 50% vacant, and the property’s owner, Paramount Group, is in serious financial trouble. The company has been battling lenders for years, but has agreed to sell to Rhythm Capital later this year.
Colliers representatives should have considered this situation before agreeing to terms at One Market Plaza. Since the Paramount acquisition had not yet been completed, the new tenants needed assurances that their leases would be honored if Risum took control or if the deal fell through. Otherwise, you may be thrown out onto the street.
Most importantly, the building is slated to receive an $850 million bill next year. If Paramount or Risum were to default on their loans, it would be catastrophic for the tenants, and operational staffing and management services could be reduced or eliminated, depending on the building’s cash flow.
Additionally, rentals to nearby offices will likely cease because the lender or receiver that will ultimately manage the property will not have the funds to invest in improvements to attract new tenants.
“Maturity loans and vacancies are a ticking time bomb,” said a San Francisco office broker who requested anonymity to protect working relationships. “The lender then begins to become involved in all aspects of the negotiation and can void the borrower’s commitments.”
To avoid leaving tenants in a bind, real estate experts recommend finding stable ownership and leasing if possible, and avoiding buildings that could quickly be sold at deep discounts.
However, if there is a building they like but are in doubt about its future, tenants should negotiate a Subordination, Non-Disturbance and Indemnity (SNDA) agreement with the building’s landlord and lender. The landlord agrees to grant a new lease in the event of a foreclosure as long as the tenant continues to pay rent.
Tenant brokers say SNDAs are never the same and can be longer than an actual lease because three parties must agree on terms. Some contracts may include early termination or rent abatement clauses, but these only apply in the most extreme cases where the landlord is failing to perform essential functions. Still, contracts tend to give owners time to address issues. Therefore, there is more sublease space on the market in San Francisco than usual.
One Market Plaza is located on the edge of the financial district near the Embarcadero. |Source: Morgan Ellis/The Standard
Paramount and Colliers did not respond to requests for comment. The asking rent for the floors leased at One Market Plaza is $100 to $115 per square foot, according to financing documents, which is on par with Salesforce Tower, 555 California and One Maritime Plaza. The real estate company has agreed to pay within that range, according to a person familiar with the deal.
To justify such an expense, tenants like Colliers will need assurances that their leases will be protected no matter what happens to Paramount Group, and that the complex will not be left to rot.
At least for now, Rhythm Capital appears to be interested in turning real estate around. In a press release announcing the acquisition of Paramount Group (opens in a new tab), CEO Michael Nirenberg said the company’s real estate portfolio is “located in cities where we have strong confidence in the recovery of office market fundamentals.”
It will help that organized players are still involved. Paramount partnered with global investment firm Blackstone to acquire One Market Plaza in 2007. Last February, the companies agreed to pay lenders $125 million in exchange for a loan extension.
This year, Blackstone also acquired a nearby office building for $111.3 million and foreclosed on a 459-room mid-market hotel. Both deals demonstrate the company’s long-term interest in San Francisco.
Putting all this together, Colliers probably felt comfortable enough to sign on the dotted line.
