As we watch the first distressed office building sales transactions of what is romantically called The Great Reset (also known as the largest single asset class value extinction event in the history of commercial real estate), we come to some observations about the leasing of these dilapidated towers come to mind.
Selling for pennies on the dollar compared to prices just three years ago, we are definitely seeing a category of new, more committed, local and private buyers. The great office value boom of the pre-pandemic era, say 2012 to 2019, followed by a brief sigh of hope that it would continue after the pandemic in 2020-2021, ended with a spectacular burst caused by interest rates and the remote labor revolution cemented.
The crazy rise in office values of the era was almost exclusively the domain of institutional sources of money at the top of the food chain versus private wealth. All of this would be in the hands of massive fund operators who tap into the oceans of cash held by government pension funds, the endowment money of top universities and colleges, and the sovereign wealth funds of foreign countries. Combine those piles with Wall Street’s straightforward alchemy schemes to raise money and you create a seemingly inexhaustible source of quick investments in office buildings and wild appreciation at the time.
The overall business model of the large-scale fund advisor owners and operators who buy all of these assets is not really about making money from the asset itself, but rather about getting paid for putting the money in the first place. . If you sell at a profit in the future, the profits are shared, but the truth is that the risk of future failure (like now) is far outweighed by the rewards associated with simply processing the money. With some exceptions, the fund operator does not lose any money, only the fund that provided the money. It kind of supports my theory that the greater the distance between money and the pocket it comes from, the worse the decisions are made about how to spend it.
We now enter the incredibly challenging new leasing market with buildings on incredibly low bases. This puts rents at new low levels, some of which date back to the 1980s.
But where are the tenants? The answer is that they must come from the relationships that the new owners have; the appeal is the personality of the owner.
When SKS/Swig rents an entire floor after its breakthrough purchase of 350 California St. from Bridge Housing, it’s because that stellar nonprofit was founded by Paul Stein’s (SKS’s S) late great-grandfather some 40 years ago and Paul has been an active board member for decades. When we recently rented the second floor of 15 W. San Fernando St. here in San José for the offices of the nonprofit Boys and Girls Club, it was directly because of the relationship of one of the building’s owners with the executive director of that excellent organization. .
If you call 550 California St. to request space, the new owner, Roger Field, and his sons will handle the leasing and construction process. Here in downtown San Jose, the first two purchases of collapsed office buildings at 303 Almaden and 111 N. Market/111 W. Saint John were not purchased by a giant fund entity or a Wall Street buyer whose name ownership in the leases reads like an encrypted password, but rather that of the founder and owner of The Shoe Palace retail empire, one George Mersho.
It seems as if we are returning to an era where the building owner’s name is on the lease and the tenant knows the landlord from community, business, or political life, or even from having dined at Original Joe’s! In some ways it makes our big cities become small towns again. It is no small relief that, as we move forward in redefining our urban centres, it will take a village.
San José Spotlight columnist Mark Ritchie owns the commercial real estate brokerage firm Ritchie Commercial and has spent his entire career in commercial real estate. His columns appear every second Wednesday of the month. Contact Marcos at [email protected].
