Real Estate Developer Soaked by Multimillion Dollar Loss on San Francisco Office Building

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Real estate developer Clarion Properties took a $60 million loss on a San Francisco office building it bought five years ago. 

The property at 410 Townsend Street is a four-story, 76,000-square-foot building. During the halcyon days of the tech industry, 410 Townsend was known as a startup village and was valued at $1,100 per square foot. That adds up to $86 million, which is what Clarion Partners bought the property for in 2019. That high price is emblematic of the high valuations of prime office property before the COVID-19 pandemic. 

Fast forward to late 2023 when San Francisco's office market and the entire commercial sector has been brought low by record-high vacancy rates, and the picture changes dramatically. According to information compiled by ATTOM, a real estate data and research firm, California led the nation in commercial foreclosures in 2023 with 187. Unfortunately for Clarion Partners and many other commercial property investors, San Francisco is the scene of much of that financial carnage. 

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Ironically, many of the innovations that made the tech industry a financial juggernaut and turbocharged Bay Area commercial real estate values are contributing to the nightmare scenario commercial real estate owners face nationwide. Remote work would be impossible without things like Slack, Zoom and Google.  

Many workers may never return to an office, which means millions of square feet worth of office space are essentially unrentable. The hardest hit markets by this new wave of remote work and office-less businesses are the ones where property values were the highest. Renting space is one of the single biggest expenses for any business. 

One of the enduring realities of the COVID-19 pandemic is that enough businesses have realized they don't need office space to create a massive glut of inventory in the commercial real estate sector. No one could have predicted this new reality in 2019 when Clarion Partners bought 410 Townsend.

By late December, 410 Townsend was struggling with a 75% occupancy rate. Clarion, who took out a $39 million loan from Nationwide Life and Annuity Insurance to buy the building, turned the keys over to the lender and walked away. The new owners, New York Life Real Estate Investors and Bridgeton, just closed on 410 Townsend for $22 million. 

In a statement about the acquisition, New York Life's Senior Director of Transactions Alfred Pura said, "It's our opinion that this is the start of the recovery for the San Francisco real estate market and 410 Townsend provides us with the opportunity to acquire a best-in-class creative brick-and-beam office asset well below replacement cost and where the asset traded in 2013 and 2019."

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