Disruption in the US office market is helping one Hong Kong’s biggest fund managers buy back a San Francisco office project it sold to Blackstone in 2018 for two-thirds off the price from that earlier transaction.
Gaw Capital Partners is said to be in exclusive due diligence to purchase North Park, an office campus along the city’s Embarcadero, from Blackstone for around $90 million, according to sources familiar with the transaction, after the firm headed by Goodwin Gaw had sold the same complex to the New York-based giant five years ago for $245 million.
Both Gaw Capital and Blackstone declined to comment directly on the reported deal, however, a representative of the US firm explained that, “We effectively wrote this investment down to zero last year given the well-known headwinds facing US traditional office buildings and the downsizing of the property’s primary tenant in a market with historically high vacancy.”
Blackstone has been backing away from office properties globally as the work from home trend and slower hiring in the tech sector challenge the asset class, at the same time that it pursues acquisitions in higher yielding segments like industrial and rental residential.
Located next to a public park and within less than five minutes’ walk of San Francisco’s piers, the website for North Park describes an urban oasis in the city’s downtown with the low-rise development spanning 293,877 square feet (27,300 square metres) of space.
The complex, which had been known as Embarcadero Square when it was owned by Gaw Capital, is currently home to a Regus serviced office location, electrical contractor CBF, ad agency Questus, medical software firm DocMatter and a broad assortment of other startups and service providers.
However, that squad of occupiers leaves the property around 40 percent vacant, according to an account in the San Francisco Chronicle, which reported the transaction earlier. At the reported pricing, Blackstone is selling North Park for the equivalent of around $306 per square foot, or 63 percent less than the $833 per square foot that it had paid Gaw for the property in 2018.
The mixed-use property has condominiums on the upper floors and commercial space on the ground level. The transaction includes only the commercial component.
The slide in value reflects the post-pandemic reality of San Francisco’s office market, with grade A space in the city averaging 30.4 percent vacancy in the third quarter, according to JLL.
Originally developed in 1982, North Park includes three mid-rise buildings at 550 and 650 Davis Street and 75 Broadway in the Embarcadero. During the four years which Gaw owned the complex they had largely converted it from retail to office use, according to an earlier report in the San Francisco Chronicle.
Gaw Capital operates a separate unit in North America, Gaw Capital USA and is reported to have recently filed paperwork for its fourth US investment fund. The firm had closed on $412 million in equity for its third US fund in 2018 and also holds an office building at 555 Montgomery Street in the Financial District, while its Downtown Properties affiliate holds two more assets on the same street.
Gaw Capital has faced challenges elsewhere in the US market this year having been hit with a foreclosure suit in Illinois in July over a $39 million debt linked to the company’s Ambassador Hotel in Chicago, which is said to be overdue. Gaw Capital purchased the landmark property for $60 million in 2016.
Office in Question
Gaw’s bet on North Park comes as analysts continue to debate the future of the US office market, with Capital Economics predicting in July that asset values in the San Francisco and Seattle markets would drop 40 percent through 2025 as new supply pushes vacancy up by more than another 10 percentage points in each location.
A JLL report shows that the grade A office market in San Francisco suffered negative net absorption of nearly 4.5 million square feet in the third quarter, meaning that the net amount of space leased by tenants contracted by 15 times the size of the North Park complex.
Blackstone has been selling off office investments over the past few years as it shifts capital into faster growing sectors like industrial, rental housing, digital infrastructure.
“What you own matters,” the Blackstone representative told Mingtiandi. “We aim to invest in sectors with strong fundamentals propelled by macro demand trends, which is why the majority of the real estate we own is in sectors like logistics, student housing and data centers.”
Once known as the largest office landlord in the US, Blackstone is also reported to be marketing 600 Townsend Street in San Francisco, an 82,000 square foot office building once fully leased by Salesforce, which is now in need of a tenant.