Starwood Capital forfeits Oakland office buildings to Deutsche Bank

Five years ago, Starwood Capital Group paid nearly $500 million for three office buildings in Downtown Oakland. Now it has lost them to its lender after defaulting on a $364.5 million loan.

The Miami Beach-based investor led by billionaire Barry Sternlicht has surrendered the three office towers at 1901 Harrison, 2100 Franklin and 2101 Webster streets, the San Francisco Chronicle reported.

Starwood had bought the trio of office buildings in 2019 in two deals for a combined $494.3 million, according to the San Jose Mercury News. The seller was CIM Group, based in Los Angeles.

One deal included the 20-story, 475,000-square-foot building at 2101 Webster Street and the nine-story, 215,000-square-foot building at 2100 Franklin Street, which make up the Oakland Center 21 office complex, for $347.1 million.

The other deal included the 17-story, 272,000-square-foot tower at 1900 Harrison Street for $147.2 million.

At the same time, Starwood also picked up a parking garage at 2353 Webster Street in Downtown Oakland for $17.7 million. It’s not clear if that property was among those surrendered.

The asset manager funded the three office towers and the parking garage with $364.5 million in financing from Deutsche Bank, which has assumed control of the office properties, according to the Chronicle. The towers are expected to be sold for prices well below their 2019 values.

The foreclosures are the latest trouble for Downtown Oakland, once a destination for companies and residents priced out of high-cost markets like San Francisco. That gap is closing because of plummeting office values in San Francisco.

Vacancy in Oakland’s nearly 12 million square feet of offices was at a record high of 30.2 percent late last year, up from 8.8 percent in 2019, according to CBRE. Some 36 percent of offices in Oakland’s central business district, which includes Uptown, Downtown and Lake Merritt, are empty.

A lack of foot traffic during weekday business hours has impacted Downtown shops and restaurants, while the city faces pressure to respond to surges in violent crime, property crimes and burglaries over the past two years.

Last year, reports of violent crimes citywide rose 21 percent from 2022, though they’ve not hit the heights of past decades.

Oakland is now in danger of losing office tenants to other East Bay markets, including Emeryville and Walnut Creek, experts tracking the Oakland office market say, citing affordability and Downtown conditions.

Lenders and institutional investors once eager to fuel Oakland’s economic development have retrenched.

For Deutsche Bank, “it’s wait and see,” an unidentified person with direct knowledge of the bank’s investment strategy for the next two years told the Chronicle.

“Office is a distressed asset. They’re taking a cautious view — more conservative than average,” the person said, adding that Deutsche Bank is “very cautious” about taking on new clients and “devoting resources” to both the San Francisco and the Oakland markets.

With a new plan to guide Downtown’s future released last week, Oakland officials hope to decouple the city’s economy from San Francisco’s, through zoning changes and incentives to encourage development while safeguarding Oakland’s arts, cultural assets and affordability.

Short-term interventions to address crime and activate Downtown include new safety cameras, reduced parking meter fees after 5 p.m. and extended hours for parking garages.

A Downtown Oakland Specific Plan, released March 22, calls for the construction of 29,100 new homes, with up to 7,275 of them affordable, by 2040.

The plan aims to generate funds for public services and to subsidize affordable housing through development impact fees and taxes. It also proposes greater land use flexibility to support diverse businesses Downtown, and encourages research and development and biotechnology.

This month, Starwood’s Sternlicht also faced sinking prospects for his home in Nantucket, Massachusetts. Storms have washed away beaches, leaving him no other option than to tear it down.

— Dana Bartholomew