Jamestown Defaults on Loans Backed by San Francisco Offices

Jamestown LP has been served with notices of default on loans backed by two San Francisco office buildings.

The notices involve a loan of about $61M for the Rialto Building, a 135K SF property at 116 New Montgomery Street and a $32.5M loan backed by 731 Market Street, a 93K building, according to a report in the San Francisco Business Times.

A notice of default sets a deadline of 90 days for a building owner to repay the loan. If the default is not cured, the lender may elect to sell the property in order to recoup the loan.

According to the Business Times report, the notice for the Rialto was served last month, while notice on the Market Street property was served in July. Jamestown acquired the Rialto in 2015 for $111M; the Atlanta-based firm also bought 731 Market Street in 2015 for $65.5M.

“As a company with a 40-year history of fostering great places and relationships, we remain optimistic and committed to the Bay Area,” said Lisa Serbaniewicz, a Jamestown spokesperson, in a statement provided to Globe St.

“That said, high interest rates are suppressing property values, which challenges debt coverage and makes agreements on new debt and debt extensions more complicated. Within this overall challenging capital markets environment, every property and the lender attached to it presents its own set of challenges and opportunities, and we are focused on finding solutions matched to each,” Serbaniewicz said.

The vacancy rate in the San Francisco office market notched a record high of 34% in the third quarter, elevated by 1.85M SF of negative net absorption, according to a market report from CBRE.

The office availability rate in San Francisco ended Q3 at 37.4%, while the average direct asking rate decreased to $71.70 FSG, a 2.6% drop from the second quarter. Year-to-date negative net absorption in the city hit ended the third quarter at minus 5.2M SF.

Leasing activity totaled 981K SF in the third quarter, a 25% decrease from the 1.3M SF leased in the second quarter. CBRE said 43% of the leasing activity in Q3 involved subleases, 32% were new direct leases and 25% were renewals.

Only six office sales transaction closed in Q3 2023 in San Francisco, including three buildings in the Central Business District that sold for less than a third of their pre-pandemic values.

Here’s the good news: according to CBRE’s report, total square footage of tenants in the market reached 5.2M SF, the highest level since Q1 2020. The increase in tenant tours is being driven by the generative AI boom in San Francisco.

“Looking ahead, the market-wide vacancy rate is expected to increase further into 2024, but the sharp increase in tenant demand over the last three quarters indicates that leasing activity will rebound in 2024,” CBRE said.

“As the market-wide vacancy rate gets closer to its eventual peak, well-capitalized landlords with a lower cost basis will be better-positioned to attract and retain tenants through competitive pricing and favorable T.I. packages,” the report said.