Exclusive: S.F.'s newest office tower is mostly empty - and now changing ownership

Downtown San Francisco’s newest office tower is a hulking, glass-clad
25-story high-rise disguised as two — twin forms rising side by side in
a SoMa neighborhood in need of reenergizing. Yet, it also might be the
city’s least successful top tier building. 

The 415 Natoma St. tower, which opened in 2022, is mostly empty despite
improving market conditions. And Thumbtack, its sole tenant, is said to
be eyeing a departure to a nearby office. 

Now, Brookfield Properties, the developer that built the first phase of
the $1 billion 5M development, is turning over the Natoma tower to new
owners, according to sources who asked not to be identified because they
are not authorized to speak on the subject. 

A partnership involving the Meridian Group and Fenway Capital Advisors,
real estate investment and management firms headquartered in Bethesda,
Md., and Solana Beach (San Diego County), respectively, on Wednesday
purchased the outstanding debt associated with roughly $400 million
construction loan for 415 Natoma, according to those sources. They said
Brookfield will continue to own the George, a 302-unit apartment complex
that was also part of 5M’s first phase and has been a recent leasing
success for the developer, unlike the Natoma office tower, which is a
case of a “great building, a great project, an ill-timed delivery,” as
one source put it. 

The public park at the center of the 5M project is owned by a homeowners
association that includes Brookfield, Hearst Corp. — owner of the
Chronicle and SFGATE — and now Meridian and Fenway. 

Hearst, which is the sole owner and developer of 5M’s second phase, a
fully entitled but yet-to-be-constructed residential tower at 110 Fifth
St., was not involved in the recent property transfer. Hearst continues
to own the residential site, as well as 901 Mission St., the historic
office building next door to 415 Natoma where its news organizations are
headquartered, said Marty Cepkauskas, Hearst’s head of real estate. 

Meridian and Brookfield declined to comment on their 415 Natoma deal. 

The sources said the deal involved the purchase of the loan associated
with the development of the office tower from Brookfield’s lender,
though what the groups paid for debt is not known. Meridian and Fenway
are expected to take full ownership of the Natoma tower within the next
month, through an out-of-court process known as a “deed in lieu of
foreclosure.” 

Public records show that Brookfield received a $393 million loan in 2020
from United Overseas Bank Limited, a leading Asian bank based in
Singapore, for the construction of the Natoma tower. It is unclear how
much of that loan was outstanding when Meridian and Fenway purchased it
this week. 

Thumbtack, the Natoma tower’s only tenant, also declined to comment on
its real estate plans. Sources told the Chronicle that the company’s
lease in the building, which spans about 20,000 square feet on the 13th
floor, expires this year. 

Meridian and Fenway are said to have plans to refresh marketing and
investment in the office tower to capture burgeoning demand in the
market from artificial intelligence startups and other companies, and
therefore would benefit from receiving the building fully vacant, market
participants told the Chronicle. The tower’s appeal lies in its big
blocks of newly constructed, contiguous space — which is a rarity in San
Francisco, even as roughly one-third of downtown’s offices sit vacant. 

Their bid underscores the continued bifurcation of the city’s office
market in the wake of the pandemic, with downtown’s newest, most coveted
office buildings outshining older buildings both in terms of leasing
activity and rental rates. While 415 Natoma has not performed as
expected, a handful of large leases signed in recent years appear to be
changing its outlook. With four proposals for new skyscrapers now on the
books, the tower could meet demand from growing companies sooner than
any planned new construction. 

Whether Meridian and Fenway’s bet on 5M can boost the project — and the
surrounding neighborhood — remains to be seen. Hearst has signaled that
it plans to revive its stalled residential tower, an effort that would
mean relocating the Chronicle and SFGATE from their longtime home at
Fifth and Mission streets to new offices north of Market Street. The
media company is still hopeful about eventually leasing the newspapers’
current home out as a university campus, after negotiations with
Vanderbilt University, which had considered taking over 901 Mission,
fizzled out late last year. 

Across the street from 5M, the San Francisco Centre, which for decades
was the city’s largest shopping mall, shuttered its doors this year,
ending a drawn-out chapter of decline and tenant departures. The mall —
which was long owned by Brookfield in partnership with
Unibail-Rodamco-Westfield, before lenders foreclosed on the property in
2023 — encountered some of the same challenges as Brookfield’s Natoma
office tower: high vacancy, declining foot traffic, difficulty
attracting tenants and broader quality-of-life issues in the Fifth and
Mission area, ranging from homelessness and street cleanliness to safety
concerns that continue to complicate post-pandemic recovery for both
retail and office spaces. 

Earlier this month, two local developers were selected to purchase the
1.5 million-square-foot mall to reimagine it with a focus on mixed-use
activity that reflects the city’s changing patterns of work, shopping
and public life. 

https://www.sfchronicle.com/realestate/article/sf-office-tower-empty-2208
5499.php