K
ylli's 22-story office tower at 225 Bush Street in San Francisco's Financial District is struggling to stay afloat, with a whopping 60% of its space vacant. The building's owner, a locally based unit of China-based Genzon Group, has defaulted on a $350 million mortgage tied to the property. According to Morningstar, the loan matured on November 6, and Kylli failed to pay the debt, prompting Deutsche Bank to report that no repayment plan had been articulated.

    The transfer of the troubled loan to special servicing suggests that Kylli may be interested in retaining ownership of the building, despite its declining occupancy and cash flow. The landlord has managed to stay current on monthly payments, but this is largely due to the interest-only nature of the $350 million loan, which allows the building to lose up to 75% of its net operating income without falling below break-even.

    When Deutsche Bank originated the loan in 2019, the building was fully occupied and generated $40.2 million in revenue. However, occupancy has since plummeted to less than 40%, with Sunrun's departure from the building in August contributing significantly to the decline. Kylli bought the former Standard Oil Building for $350 million in 2014, and its two largest tenants, LiveRamp and Stryder, have leases ending in 2029 and 2027, respectively.

    The overall office vacancy rate in San Francisco has reached a record high of 37.3%, according to CBRE, with some building owners opting to sell their properties at discounts or walking away from their investments altogether. Kylli, which has over $1.6 billion in assets under management in California, is facing significant challenges as it navigates the city's shifting office market.