Kilroy Realty to Sell Mission Bay Office Complex for $1 Billion
Updated: Mar 9, 2021
Kilroy, a major office landlord in San Francisco, plans to sell The Exchange, a complex located at 1800 Owens, for $1.08 billion or $1440 per square foot
The deal is the largest commercial real estate transaction ever in San Francisco on a price per square foot basis, according to Kilroy
Kilroy owns 10 office buildings in San Francisco, and developed The Exchange five years ago for $585 million or $780 per square foot
In 2017, Dropbox signed a 15-year lease to occupy the entire office footprint at The Exchange, but has since put most of it up for sublease
Kilroy Realty, a major office landlord in San Francisco, announced that it will sell The Exchange, a massive complex in Mission Bay, for more than $1 billion.
One a price per square foot basis, the deal is the largest commercial real estate transaction in San Francisco's history, according to Kilroy. The 750,000 square foot property, located at 1800 Owens St., will sell for about $1,440 per square foot. The $1.08 billion deal is expected to close by the end of this month.
In a statement, Mayor London Breed called the deal a "resounding sign that people are still excited to be a part of San Francisco and its future."
Kilroy kicked off development of The Exchange in 2015, and later signed a 15-year lease with Dropbox to occupy the entire office space. The tech firm has put about 400,000 total square feet up for sublease since the beginning of the pandemic, according to the San Francisco Business Times.
The total development cost of The Exchange was $585 million or $780 per square foot, said Kilroy, marking a tidy profit on the deal—and a possible bullish signal for San Francisco's office market.
San Francisco office rents and occupancy have plunged during COVID, with the City recording the steepest declines of any metro area in the U.S. The preponderance of remote work, particularly in tech- and office-heavy San Francisco, raised questions around how soon the downtown economy might recover.
On a call with shareholders, Kilroy executive vice president Robert Paratte said that in January and February, the company saw more tour activity in its San Francisco properties than it had "in all of the last 10 months of last year," which he called a leading indicator of leasing activity.
As of January, total unoccupied office space in San Francisco totaled roughly 14 million square feet, according to Socketsite. Kilroy executives said that since the beginning of this year, subleasors have taken approximately off the market to use for their own purposes, reflecting a possible "return to work" mentality.
"The better quality space, the Macys.com space or the Uber space, will lease and i think it's a function of how quickly the vaccine takes hold," said Paratte, referring to large chunks of vacant space near downtown. Lower-quality class B or C commercial spaces, which are more common in deep South of Market, may recover less quickly and could be candidates for conversion to housing, he added.
Kilroy noted that the fiver largest public tech companies in the Bay Area added 19,000 jobs between Q2 2020 and Q4 2020, which equates to roughly 4.75 million square feet and a possible demand boost for office space.
Whether any such job gains are enough to offset the impact of remote work remains to be seen. Several major employers in the City, including Salesforce, Dropbox, Twitter and others, have extended remote work policies indefinitely for at least some of their workforce. Around 70% of the City's payroll tax base is derived from office-based sectors, such as information and professional services, that have largely switched to telecommuting during COVID.
"Other large tech firms such as Twitter and Spotify have implemented policies that will allow their employees to work from indefinitely, should they choose to, making people even less tethered to the city they 'work' in," said Ari Rastegar, CEO of commercial real estate firm Rastergar Property Company.
Kilroy didn't disclose the buyer of The Exchange, but it is reportedly the private equity giant KKR.
The buyer "did a thorough underwriting, as [did] others that were interested in the property...we think they looked at it as a fabulous investment and a great deal," according to Paratte.