KBS Fund Poised to Surrender SF Office Building to Lender

A KBS Realty Advisors fund may call it quits for a 252,600 square foot office building in Downtown San Francisco.

The KBS REIT III fund, tied to the Newport Beach-based investment firm, is poised to surrender the 18-story tower at 201 Spear Street in the Financial District to its lender, the San Francisco Business Times reported, citing a regulatory filing.

The office building, home to such firms as WeWork and Google, faces a financial crisis as its occupancy and value plunge ahead of a debt maturity deadline early next year.

The KBS fund bought the Class-A building in 2013 for $121 million, according to its website.

This year, the fund had non-cash impairment charges of $18.5 million and $45.5 million, and had to “write down the carrying value of 201 Spear St. to its estimated fair value,” according to the filing.

As a result, the 39-year-old office building is now worth “substantially less” than the fund’s outstanding mortgage debt of $125 million.

Given the split between its value and debt within the moribund San Francisco office market, where one in three offices stand empty, the fund anticipates surrendering the building through foreclosure.

“We may determine that it is not in our stockholders’ best interest to make significant paydowns on the loan and invest additional funds into this asset in an effort to refinance and extend the loan,” the fund said in its filing.

KBS blamed the loss in value on market uncertainty caused by rising interest rates and growing vacancy rates tied to a slow return by workers to offices in San Francisco.

It said the asset’s declining value is also based on “additional projected vacancy due to anticipated tenant turnover and further declining values of comparable sales in the market, all of which impacted ongoing cash flow estimates and leasing projections.”

The demise of 201 Spear Street near the Embarcadero reflects the fall of San Francisco’s once robust office market.

In 2019, the brown accordion-faced tower with waterfront views was 97 percent leased.

Last March, its occupancy had dropped to 65 percent — half taken up by New York-based WeWork, now headed toward bankruptcy. Google, a WeWork tenant at the building, is slated to pull out next month, the KBS fund said. Should WeWork leave too, occupancy would drop to 30 percent.

When Marc DeLuca was named CEO of KBS Realty Advisors last year, interest rates were low and insiders were still hopeful workers would go back to the office. Since then the tides have turned.

“Part of the problem is that nobody knows what a building’s worth right now,” DeLuca told the Real Deal in an interview last spring, after cashing out of the 52-story Union Bank Plaza in Downtown Los Angeles. “The lack of trades is something unprecedented.”

— Dana Bartholomew