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  • Writer's pictureRealFacts Editorial Team

Hudson Pacific Buys Out San Francisco Tower Stake at 80% Discount

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In a strategic move reflecting the evolving world of commercial real estate, Hudson Pacific Properties has made headlines by buying out its partner’s substantial stake in a Market Street office tower at a remarkable 80% discount from its original purchase price.

The Los Angeles-based real estate investment trust (REIT) acquired the Canada Pension Plan Investment Board’s 45% share in 1455 Market Street for approximately $44 million. This purchase comes in stark contrast to the $219 million paid by the pension fund for the same share back in 2015, marking a significant devaluation of the property.

1455 Market Street, a prominent 22-story building that once served as Uber’s headquarters, has seen its value plummet from around $471 per square foot to a mere $93 per square foot since the 2015 transaction. This devaluation underscores the challenges facing commercial real estate in San Francisco, particularly in the wake of shifting market dynamics and the impact of the COVID-19 pandemic.

Hudson Pacific initially purchased the tower in 2010 for $93 million and invested an additional $50 million in renovations before selling the stake to the Pension Board. Despite these efforts, the building's value has since declined substantially, reflecting broader trends in the San Francisco office market.

However, Hudson Pacific is not merely a bystander in this changing landscape. Last month, the company reached a significant agreement with the city of San Francisco for a long-term lease of 157,000 square feet at 1455 Market, with an option to purchase the tower. Under the terms of the lease, the city will occupy several floors, including substantial space on the seventh floor and various other floors, for an initial term of 21 years, with renewal options.

The lease agreement includes a base rent starting at $40 per square foot and escalating to $72 per square foot over the term. Additionally, the city will receive concessions such as a tenant improvement allowance of $100 per square foot and the option to acquire furniture from previous tenants for a nominal fee. Moreover, the city has the option to expand its footprint within the building by leasing additional floors, subject to certain conditions.

Crucially, the purchase and sale agreement between Hudson Pacific and the city’s Real Estate Department allows the city to acquire the entire office tower if it occupies at least 400,000 square feet by the end of 2027. The purchase price, determined by an appraiser, will not fall below $200 per square foot.

This bold move by Hudson Pacific comes at a time when Mid-Market office towers in San Francisco have been trading at steep discounts, reflecting the challenges posed by high vacancy rates and shifting tenant demands. With office vacancy rates reaching 36.6% in the first quarter of 2024 and total availability on the rise, commercial real estate players are navigating a challenging market landscape.

In a similar vein, a recent deal involving a Market Street tower saw an affiliate of Florida-based LNR Partners acquiring a 16-story office tower at 995 Market Street at a significant discount, highlighting the broader trend of discounted transactions in the San Francisco office market.

Overall, Hudson Pacific’s buyout of its partner’s stake in 1455 Market Street represents a bold strategic move in response to the changing dynamics of the commercial real estate market in San Francisco. As the city continues to grapple with high vacancy rates and evolving tenant preferences, such strategic maneuvers will likely shape the future of the commercial real estate landscape in the region.

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