Paramount May Give Up San Francisco Office Towers

Paramount Group looks like it is preparing to give up two downtown San Francisco office properties for which it acquired stakes in 2019 in deals that totaled nearly $1B.

Paramount has written down to zero both properties, the two-tower 750K SF Market Center at 555 and 575 Market Street and a 293K SF office building at 111 Sutter Street.

“These two assets are in workout mode. We do not know what an ultimate resolution will look like, and there is a strong possibility that these assets may not be in the Paramount portfolio going forward,” CEO Albert Behler said in a recent earnings call.

Wilbur Paes, CFO of NYC-based Paramount, said during the Feb. 15 call that the firm has removed the two San Francisco office properties from its core portfolio, according to a report in the San Francisco Business Times.

“By excluding it from the get-go, investors are able to appreciate the impact on a go-forward basis, should the resolution be where we end up handing the keys back to the lender,” Paes said.

Behler said both properties, which are located about a block from each other in the Financial District, have market values that have dropped significantly below the debt deployed to buy them. They also have loans coming due in less than 12 months: 111 Sutter in May and Market Center in January.

Paramount bought the historic Hunter-Dulin Building at 111 Sutter in partnership with Harbor Group International in 2019 for $227M, which translates to $775 per SF, in a deal that was financed by Mesa West Capital. Paramount has a 49% ownership interest in the property, which was about 57% leased at the end of 2023, the report said.

A few months later in 2019, Paramount and an unspecified joint venture partner acquired Market Center for $722M, or $960 per SF. Paramount has a 67% ownership interest the property, which was 55% leased at the end of the year.

Paramount isn’t giving up on its San Francisco portfolio. In January, Blackstone and Paramount, which own approximately equal stakes in San Francisco’s One Market Plaza, secured an extension on a $975M loan backed by the 1.6M office complex.

The loan was set to mature last month. The partners agreed to pay the loan down to $860M in exchange for an extension to a new due date of February 2027.

One Market Plaza encompasses three office buildings at 1 Market Street along the Embarcadero, including the 27-story Steuart Tower, the 42-story Spear Tower and a six-story retail and annex space.

Although the complex was transferred to special servicing in advance of the negotiated loan extension, the partners described the transfer as “purely a procedural step needed to effectuate a change to the term of the loan, which required approval from the special servicer.”

Blackstone and Paramount, in a joint statement provided to GlobeSt.com, stressed that the One Market complex has been outperforming other office properties in the San Francisco market.

“This property is approximately 96% occupied, has seen the most direct leasing volume of any office building in San Francisco over the past three years and has recently signed leases at rents above pre-COVID levels,” a spokesperson for the two companies said.

“Our continued belief in the strength of this trophy asset is illustrated by our decision to invest additional capital in it,” the spokesperson said.

Based on recent leasing activity, One Market Plaza, which offers an unobstructed view of the Bay, has been able to secure net effective rent that is 20% higher than other trophy office buildings in San Francisco.