S
an Francisco's commercial real estate market has been hit hard by a combination of factors including high interest rates, decreased office utilization, and a retreat by major institutional investors. However, this situation has presented a unique opportunity for savvy investors who are willing to take a risk. In the past two years, several office buildings have been purchased at a fraction of their pre-pandemic prices, attracting both local billionaires and outsiders entering the market for the first time.

    Greg Flynn, a local businessman, recently partnered with Ellis Partners to purchase a five-story Class B office building at 631 Howard St. for $36.4 million, which is approximately 42% less than the $62 million paid by Atlanta-based Invesco in 2014. The building is fully leased to tenants such as Finix and SC Johnson, and although their leases expire next year, the building's location, size, and modern interiors make it resilient in a downturn. Flynn believes that even if the office market only experiences a moderate recovery, they will still do well.

    Flynn Properties has been actively searching for deals, having missed out on another office building on Townsend Street this year. Last year, they purchased the historic Huntington Hotel in Nob Hill for more than 50% off and are currently renovating the property with plans to reopen it in 2025.

    Ellis Partners, run by siblings Jim and Melinda, is another local firm that shares Flynn's mentality. They believe that things will get better eventually but are more focused on vetting buyers' ability to execute and perform on their bid during this challenging time. Sellers are now more focused on vetting buyers' ability to execute and perform on their bid due to the drying up of capital markets, which has led to more "syndications" emerging from competitive bidding processes as winners.

    In Mid-Market, the outlines of a "Z" - the logo of customer-service software company Zendesk - are faintly visible on the wall behind the lobby desk at 989 Market St., where Zendesk is the sole tenant. Despite Zendesk's departure, Peter Horn of BH Properties, a Los Angeles-based company with a hankering for properties "with significant vacancy," is bullish on the building. During a walkthrough of the space on the day his company's reported $13.5 million deal for the building closed, Horn spoke about beating out local, high net-worth syndicates in the bidding process for 989 Market.

    Horn believes that small- to medium-size office spaces will bounce back faster than big-box spaces, which are driving San Francisco's record-high office vacancy. He also mentioned that dedicated and discretionary capital can afford to be patient, unlike lenders who are active in the San Francisco office market but inclined to make smaller bets than the financing deals of the previous decade.

    ASB Real Estate Investments sold 989 Market to BH Properties under pressure from its lender, while Alaska-based Fountainhead Development Group borrowed from First National Bank of Alaska to execute the $48.3 million deal for 795 Folsom St., less than half the $109.6 million the building last sold for in 2013.

    Flynn Properties and Ellis Partners recently closed on a restored century-old office building at 631 Howard St., which was built in 1929 and features a classic Art-Deco exterior with large windows that filter in natural light. Inside, Finix's office space is a modern, three-level, open-floor design with more communal gathering space than desks. The two companies decided to split the bill on 631 Howard so that both had more capital to invest in other projects across the city.

    In conclusion, while the commercial real estate market in San Francisco has faced significant challenges, savvy investors are seizing opportunities to purchase properties at a fraction of their pre-pandemic prices. The market's resilience is attributed to factors such as the location, size, and modern interiors of buildings like 631 Howard St., which are expected to perform well even in a downturn.