Class A office buildings with sweeping views have become one of the few bright spots in San Francisco’s commercial market, with lower vacancy rates and higher rents than the rest of downtown.
But the vacant four floors at the top of 505 Montgomery Street — known for its Empire State Building-like spire and lavish Art Deco lobby — show that even listing agents with trophy offices with bay and bridge views have a lot to overcome Difficulty finding a long term tenant.
“We will accommodate any needs of our tenants,” said Colliers listing agent Scott Harper. “We’re going to spend as much TI as we can on the right tenant for the right purpose.”
Tenant improvements and rent-free rents are the two biggest bargaining chips Harper has to offer, as annual asking rents for these high-rise landscape floors remain in the low to mid-$90s per square foot, he said. The 1988 building has been owned since 2005 by a REIT linked to Deutsche Bank’s DWS spin-off, and the property has no debt, meaning owners can be “more selective,” Harper said. “The right tenant, not just any tenant.”
Colliers data shows that TI and free rents are on the rise across the financial district and in SoMa, both at about double their levels in the first quarter of 2020.
Deal incentives such as higher commissions, gifts and free travel for tenant agents are coming soon and aren’t unique in the current market, Harper added.
top tenant
The Class A building, which has attracted professional services firms and law firms such as anchor tenant Latham & Watkins, lost two long-term tenants on the top floor of the 24-story building last year, according to Harper. Private equity fund Horsley Bridge Partners occupied the 21st and 22nd floors, but was downsized to a floor at 140 New Montgomery when the lease expired. Medical device business Resmed requested an early termination of its lease on the 23rd floor and agreed to ownership. Harper said the 24th floor had long been vacant, in part because there was a dedicated elevator connecting it to the 23rd floor, and no one wanted to rent it out with the existing tenants below.
In the current market, the 23rd and 24th floors are offered together for a total of nearly 15,000 square feet, with the 24th floor being discounted as some of its views and layout possibilities are compromised by the machinery at the top of the building. The 21st and 22nd floors are leased and are 11,000 and 10,000 square feet respectively. Harper has done about a dozen tours, but so far no one has been interested in renting them together.
“If you want 20,000 square feet, you want them on one floor,” he said. “That’s why we lost Horsley.”
lower berth
These aren’t the only empty floors in the North Financial District building. The largest infill spaces are on the second and third floors, totaling over 30,000 square feet. The eighth and ninth floors are also vacant, as is the fifth, which is a spec suite with a “modern exposed ceiling,” according to the listing description. Each of the 15,000-square-foot floors is sold individually, though Harper said the owner is considering breaking up some floors into smaller suites, as that seems to be the most attractive aspect of the building.
“We’ve got good activity on the lower floors up to 5,000 square feet,” Harper said, where annual rents are asking around $70 a square foot.
National law firm Berger Montague recently opened its first San Francisco office in approximately 3,000 square feet on the building’s six floors. In the larger deal, ATEL Capital “moved over from the pyramid,” Harper said, swapping 20,000 square feet on the ninth floor there for 15,000 square feet on the seventh floor at 505 Montgomery.
Two other suites on the sixth floor will be vacant in July, but the tower has also had some success maintaining its current roster, most notably global law firm Latham & Watkins, which occupies the 10th floor. Regus, which is located on the 10th and 11th floors, renewed its long-term lease two years ago, Harper said, adding that the co-working spaces are filling up again after activity slumped at the start of the pandemic. Private wealth manager Whittier Trust recently updated and expanded much of the 12th floor, and the owner has thrown in another spec suite to lure tenants to the remaining 1,800 square feet.
Further investment in the building includes a first-floor renovation this fall, including a fitness center, bike parking, and a café and bar—another example of downtown buildings adding street furniture to attract tenants and foot traffic.
But in the post-pandemic office market, the highest rents are on the top floors of buildings.
From 2019 to the end of last year, the average annual effective rent for prime view space leasing transactions rose 9.5% to $112.24 per square foot, according to CBRE. Meanwhile, Class A effective rents fell nearly 5% overall. Vacancy rates for landscape architecture also tightened to 9% in the final quarter of 2022, while all Grade A buildings in the city center had vacancy rates above 20%.
At 505 Montgomery, the smaller, lower-floor suites are likely to move first, but Harper said he is encouraged by the hope that things that start on the ground floor may work their way up to the top floors.
“I’m happy to see smaller tenants starting to come back into the market,” he said. “They don’t need to be the same size, but a willingness to take up space again is a good sign.”
