Michael Shvo can list a litany of challenges he has faced since his eponymous development company decided to buy San Francisco’s Transamerica Pyramid in 2019.
There were 44 bidders on the property, he said, and it took six months of bids and interviews to win the deal. After the bidding process came the pandemic, causing the lender for Shvo and his partners, Deutsche Finance America and the German pension group Bayerische Versorgungskammer, to pull out. On top of that, the city’s Building Inspection Department was closed and seller Aegon NV, a Dutch-based insurance company that became the building’s owner in 1999 as part of its purchase of the Transamerica Corporation, couldn’t close out open permits to complete the sale.
When the acquisition finally closed for $650 million in October 2020, Shvo said, “Everybody thought that the world has come to an end and San Francisco is getting wiped off the planet.”
But still Shvo moved forward, putting a budget of $400 million on renovating the historic building and the surrounding block, which has two other buildings and a Redwood Park.
“Every single thing that could have gone wrong for us to buy this building has gone wrong, and with that we prevailed because I have a vision and I move forward. We just stick to what we believe in and, thank God, it paid off,” he said.
The park and pyramid opened with great fanfare in September and Shvo said three leases closed around that time with rents ranging from $125 to $185 a year per square foot, significantly higher than the average of about $60 for Jackson Square in the third quarter, according to Colliers data. A new all-day cafe from Miami chef Bradley Kilgore opened at 3 Transamerica just this month, with a more formal restaurant from Kilgore still under construction.
SHVO, the name of his firm, has also signed a multi-year partnership for the pyramid to be the official hospitality partner for TED AI San Francisco, which brought in nearly 2,000 investors and founders from around the world in October, according to a company rep.
“The peak of the whole AI business is in San Francisco,” Shvo said. “When you talk about artificial intelligence, San Francisco is the heart of that industry. We’re seeing that through leasing. We’re seeing that through activity in the building.”
It hasn’t been all smooth sailing since the opening. SHVO is still in an ongoing legal battle with CORE Club, a luxury members-only club that alleges it was deceived into signing a 20-year lease with “exorbitant rents.” SHVO has countersued, claiming CORE Club is “incapable of paying back their debts.”
Shvo declined to discuss the ongoing litigation other than to say that, “if we end up having to get rid of them because they’re not following their lease obligation, we have a list of multiple tenants as a backup to lease that space.” He declined to state who those tenants would be.
In this interview, Shvo opens up to TRD about why the idea of owning “the most important building in San Francisco” was an easy sell to his German backers, and how he sees it as a “catalyst” for rejuvenation in Jackson Square and its surrounding neighborhoods. He also says all the “challenges and heartaches” have been worth it.
“Being a real estate developer, you wake up in the morning to solve problems,” he said.
Is there anything you would have done differently at Transamerica?
I’m sure there’s a bunch of stuff technically we might have done differently. But I think that when you see the project done, all the challenges fly out the window because all you see right now is the beautiful building. You see the results, and you see the tenants that are renting the spaces.
What lessons have you learned from this project as you look at taking on the rest of the block?
3 Transamerica is easy because you already created the platform. It’s there. So now it’s just putting the last piece of the puzzle into it. But that’s by far the easiest part. The hardest part was to get people to believe the vision, to believe that really in San Francisco, if you take this amazing architectural icon and bring it to the future, that people will come and pay rents that are double and triple what they did previously.
Now we have proof of concept, and people are here and there’s life on the block. So 3 Transamerica is the easiest part in this whole equation.
Is there any concern about adding more office space when we already have so much available in the city?
We don’t have new office space in the city. We have old office space. Nobody wants the old office space.
What we’ve seen through COVID, and what really changed in the office market, is that owners and owners of firms need to give employees a reason to come to the office. This is why there’s a huge flight to quality that has been outperforming the market.
At the Transamerica Pyramid, from an occupancy perspective, we are back to the pre-COVID numbers, which is kind of amazing because that is way ahead of the market. I think that there are other buildings that are not offering all the great amenities or all the great reasons for tenants to come to work, and with those you’re seeing that employees prefer to be at home.
The purpose of the office is for people to be together, to work together and to create a collaborative environment. But if the environment is not a good environment to collaborate in, people don’t want to come.
So not all offices are created equal. We know that. And I think that’s what you’re talking about when you talk about the general numbers of San Francisco. I don’t concern myself with the general numbers of San Francisco, because we don’t own the San Francisco market. We own the best building in San Francisco.
How do amenities play into getting high rents?
We have a private bar on the 40th floor. We have a full floor of lifestyle wellness from a gym to spa treatment rooms, showers, lockers, with amazing views of the bay and the Golden Gate Bridge. We have a full floor of conferencing and lounging for tenants. We have four food and beverage outlets.
The level of detail and the finishes, you don’t see these things in office buildings. This doesn’t fall short of what we build in our residential development, which is really what we set out to do. We wanted to make sure this building is at the same level as the Amman, or the Mandarin, or the Rosewood. We went through months and months of training with the people here, upgrading everything to hospitality level.
This is the DNA of SHVO, right? It’s all about service. I could tell you how great the walls are, or how great the marble is, or how great the gym is. But it’s about the experience. We are developers of hospitality that own and operate office buildings. We’re not office building owners that try to infuse hospitality.
How would you describe your experience working with the City of San Francisco?
There’s a reputation that it’s a difficult, lengthy process. The city for me has been nothing but great to work with.
We own the most important building in San Francisco and I think that there’s very much an appreciation of what we brought to the city, what we’re doing for the city, and the fact that we’re rejuvenating Downtown in such a way, not just by talking about it, but investing a billion dollars behind this promise.
What are the stakes for the city in having a building of such prominence be a success?
The idea that we are in the heart of all these different neighborhoods, from Russian Hill to Chinatown to Jackson Square, and we’re the fabric that brings all these different neighborhoods together, you’re already seeing the effect of what we’ve done here. Jackson Square has been booming over the last year and a half, real estate has been trading at high prices. Rents got higher. The stores have been filled. Related announced that there’s a new building that they want to build across the street from the pyramid.
We are helping the city come out of a very difficult time, and I’m not saying that we alone are responsible for that, but I think that as far as this area of Downtown, we’re definitely the catalyst of growth.
With locals buying many office buildings in recent San Francisco transactions, how were you able to convey to your backers that the pyramid was a good deal?
My partners in this building and in our entire portfolio are large German institutions and our mandate is quite simple: we develop, own and operate super prime real estate.
There’s not much that you need to convey when you want to buy the Transamerica Pyramid. Our partners recently said in their annual report that the Transamerica Pyramid is the most important acquisition they’ve ever done [in] the United States.
Now, obviously the investment was behind a very specific vision that I had to transform this building from an asset built by an insurance company to one of the greatest buildings in America. Today we are one of the three most expensive buildings to rent space in because of what we’ve done here, coupled with the historic importance of this building.
It’s not that difficult to explain that to investors who are not in the city. What was more difficult was actually to buy the building. I got a lovely letter from Transamerica that we were selected from all the 44 bidders, not because we paid the highest price — there were actually bids that were higher than our bid — but because they believed that we would be the best steward of their brand. While they don’t occupy or operate the building, their name is on the building and it’s a very humbling idea that by having this building in SHVO’s hands it will enhance their brand.
Obviously, we have a lot of sublease office space on the market. Is that what you’re competing with?
It’s like saying, I want a car. You can go buy a used car or you could go buy a new car, and you can go buy a Toyota, or you can buy a Mercedes, or you could buy a Rolls Royce.
There’s a lot of product and if there are people who want to buy the Toyota, they buy the Toyota. There’s somebody that wants a Rolls Royce, they buy the Rolls Royce. We’re geared for a specific user, a specific tenant, and in our market we are the only player in San Francisco today.
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