WeWork, Rhone JV Defaults on San Francisco Office Tower

A joint venture started by WeWork and Rhone Group in 2019 has defaulted on a $240M loan for an office tower at 600 California Street in San Francisco’s Financial District.

WeWork coworking offices are an anchor tenant in the 20-story building, which is owned by funds that were formed in a venture aiming to buy and oversee real estate, Bloomberg reported.

When it formed the venture in 2019, WeWork had 25K members across 26 Bay Area locations as well as a large office at the Bishop Ranch complex in San Ramon.

Late last month, Vornado Realty Trust and The Trump Organization asked for an extension on a $1.2B loan for a 52-story office tower at 555 California Street after it was put on a service watchlist.

Nearly a third of the offices in San Francisco are empty, a vacancy rate that approached 30% in Q1 2023.

As major tech players retreated from offices in San Francisco throughout 2022, the vacancy rate in the city grew by more than 10%; it’s grown by an additional 2% since the end of last year, according to a report from CBRE.

Empty offices now encompass 27M SF in San Francisco, eight times the amount in 2019, when vacancy was 5%. Available space has risen above 34%, including the growing amount of offices listed for sublease that are not yet vacant.

The amount of office space on the market for sublease is approaching 10M SF. More than 900K SF was listed in Q1 2023, including substantial listings from Pinterest, Meta and Slack.

Rubbing salt in the hometown wounds, the San Francisco Business Journal said San Francisco’s downtown is “the most empty downtown in America” with enough empty space “to fill 18 Salesforce Towers.”

Salesforce, San Francisco’s largest employer, listed for sublease last summer about 412K SF of the 817K SF Salesforce West tower on Fremont Street as the tech company shifted to hybrid work.

Negative absorption totaled 1.8M SF in the first quarter. Compounding these dismal results are an ongoing wave of expiring leases involving anchor tenants who are looking to downsize, especially tech players who have embraced remote work, CBRE said. Expiring sublease spaces that provided rent revenue turn into direct liabilities for landlords.

An increasing number of older San Francisco office properties are in distress, with building owners unable to make payments or to refinance as loans come due amid rising interest rates.

Last month, San Francisco-based Redco Development and AEW Capital Management of Boston gave the keys back to San Francisco’s historic 1st National Bank building after failing to make their mortgage payments.

Redco and AEW Capital filed a deed-in-lieu of foreclosure for the august banking landmark, now a vacant office building, at 1 Montgomery Street. They gave the building to lender Affinius Capital, based in San Antonio, according to a report in the San Francisco Business Times.