Gem and Flynn Face Foreclosure in SF’s Union Square

So much for reports of a new political climate in San Francisco ushering in a revival for properties in Union Square.

Chicago-based Gem Realty Capital and locally based Flynn Properties have defaulted on two office buildings whose appraised value has dropped 76 percent in five years at 222 Kearny Street and 180 Sutter Street, the San Francisco Business Times reported.

Gem and Flynn Properties bought both buildings in a 2019 deal that valued the pair at $74.75 million, or $516 per square foot.

This summer, appraisers marked the value of the 121,000-square-foot building on Kearny and the 24,000-square-foot building on Sutter at $18.3 million, or $126 per square foot, according to November notes sent to CMBS bondholders.

Office values across San Francisco have plunged over the past five years as demand for office space fell during a pandemic shift to remote work.

In Union Square, which has 3.9 million square feet of offices, vacancy was 29.2 percent in the third quarter, according to CBRE.

Nonetheless, the election of a moderate mayor and city leaders has encouraged luxury retailers such as Goyard to double down on Union Square.

When the French trunk and leather goods maker punched out its Maison Goyard store this month at 118 Grant Avenue by leasing the former Montblanc store next door at 120 Grant Avenue, real estate brokers and business groups celebrated.

Kazuko Morgan, a broker at Cushman & Wakefield, said dealmaking has picked up in the week since San Franciscans voted in a new mayor, supervisors and dozens of local and state ballot measures.

“It’s 100 percent the local election,” Morgan, who represented both sides in the Goyard expansion deal, told the Business Times. “There’s interest from all of these out-of-town tenants and investors.”

None of the hoopla made any difference, however, for Gem and Flynn. Occupancy in their office buildings had fallen to 28 percent in June, from 91 percent in 2019.

The building on Sutter could see further losses. Medical care startup Forward, which leased the ground floor for a flagship clinic, is shutting down.

In April, lenders served the pair with a notice of default for a $47.5 million loan linked to the two buildings, alleging they were more than $2 million behind on payments. The commercial mortgage-backed securities loan, which matures in 2029, was sent to special servicing in July.

Unidentified lenders reported in July they would move to foreclose on both buildings this August.

But foreclosure proceedings have been repeatedly pushed back, according to CMBS data, and now lenders are targeting foreclosure early next year.

— Dana Bartholomew