San Francisco Gets Discount Lease, Option to Buy Office Tower

The city of San Francisco, which has seen its downtown hollowed out by empty office buildings, has decided to leverage the crisis to its own advantage by securing a discount deal to anchor a Market Street office tower.

The city’s agreement with landlord Hudson Pacific Properties for 1455 Market Street—a 22-story tower that once served as the headquarters for ride-sharing giant Uber—includes a long-term lease for 157K SF, which begins with a base rent of $40 per SF, and an option to buy the 1M SF tower, the San Francisco Chronicle reported.

The deal is part of a strategy for the city to consolidate its current office footprint and get a better deal on the space it needs in a market with an office vacancy rate of nearly 37%. The city is opting out of a lease at 11-story 1155 Market Street and consolidating space for city departments at 1455 Market.

“The market is trending the other way,” Aaron Peskin, president of the San Francisco Board of Supervisors told the newspaper. “We needed to set an example that we are not captive to the Mid-Market office world—we have a lot of vacancy downtown and we can talk with our feet. As a result, we are now getting $40 per square foot at 1455 Market.”

Under the pending lease agreement, which begins in May, the city will initially lease about 52K SF of the seventh floor at 1455 Market, and all of floors 12, 13, 15 and 17. The term of the lease is 21 years, with two five-year renewal options.

Base rent for the city’s lease will start at $40 per square foot and escalate to $72 per square foot in year 21. Concessions include an allowance for tenant improvements of $100 per SF; the city may also acquire furniture left behind by the building’s departed tech tenants for $1, the report said.

The city also has been given an option, which it must exercise by the end of 2027, to expand its footprint in the building by leasing the sixth floor, which encompasses 132K SF; the fourth and fifth floors, with 98K SF and 99K SF, respectively; and a 66K SF sublevel floor.

On the condition that the city occupies at least 400K SF at 1455 Market as of Dec. 21, 2027, a purchase and sale agreement between Los Angeles-based Hudson Pacific and the city’s Real Estate Department will allow the city to purchase the 1M SF office tower.

The purchase price would be set at a market value to be determined by an appraiser but may not fall below $200 per SF, the report said.

The city also is negotiating a deal for 120K SF at a 13-story office building at 1145 Market Street with a base rent of $30 per SF, the Chronicle reported.

Peskin told the newspaper that the city’s new leases will be a “boon to Mid-Market,” a tech-office hub that has suffered as tech players downsized their footprints and shifted to remote work during the pandemic.