Ritchie: The personality of ownership
The commercial real estate market for office space in San Jose has turned upside down. Photo courtesy of Frank Andre.

As we see the first distressed office building sale transactions of what is romantically called The Great Reset — also known as the greatest single asset class value extinction event in commercial real estate history — a few observations about the leasing of these battered towers come to mind.

Selling for pennies on the dollar from the prices of just three years ago, we are definitely seeing a category of more engaged, local and private new buyers. The great office value boom of the pre-pandemic era, say from around 2012-2019 followed by a brief gasp of hope that it would continue post-pandemic in 2020-2021, ended with a spectacular splat that interest rates brought on and the remote work revolution cemented.

The mad run up of office values of the time was almost exclusively the domain of top of the food chain institutional sources of money versus private wealth. These would all be in the hands of the massive fund operators tapping into the oceans of cash held by government pension funds, top dollar university and college endowment money and foreign country sovereign wealth funds. Combine those piles with straight up Wall Street alchemy money-raising schemes and it created a seemingly endless source for the rapid fire office building investments and wild appreciation in that era.

The general business model of the large scale owners and operators of the fund advisors buying all these assets is not really about the making of money on the asset itself, but more about getting paid for placing the money in the first place. If it does sell at a profit in the future the winnings are shared, but the truth is the risk of a future failure (like now) is well outweighed by the rewards associated with just processing the money. With a few exceptions, the fund operator doesn’t lose any money, only the fund that provided the money does. Kind of backs up my theory that the further the distance between the money and the pocket it came from, the worse the decisions are made about how to spend it.

Now we enter the new incredibly challenged leasing market with buildings at new wildly low bases. This sets rents at new low levels, some back to the rents of the 1980s.

But where are the tenants? The answer is they must come from the relationships that the new landlords have — it is the personality of ownership that is the lure.

When SKS/Swig leases a full floor after the icebreaking purchase of 350 California St. to Bridge Housing, it is because that stellar nonprofit was founded by Paul Stein’s (the S of SKS) late great father some 40 years ago and Paul has been an active board member for decades himself. When we leased the second floor of 15 W. San Fernando St. here in San Jose recently for the offices of nonprofit Boys and Girls Club, it was directly because of the relationship of one of the building owners to the executive director of that fine organization.

If you call on 550 California St. for space, the new owner Roger Field and his sons will handle the lease and buildout process soup to nuts. Here in downtown San Jose, the very first two collapsed value office building purchases at 303 Almaden and 111 N. Market/111 W. Saint John were not bought by a giant fund entity or Wall Street buyer whose ownership name on the leases reads like an encrypted password, but by the founder-owner of The Shoe Palace retail empire, one George Mersho.

It seems as if we are returning to an era when the building owner’s name is actually on the lease and the tenant knows the owner from community, business or political life, or even from dining at Original Joe’s! Kind of makes our big cities back into small towns. There is no small relief in that as we navigate redefining our downtowns, it will take a village.

San José Spotlight columnist Mark Ritchie is the owner of commercial real estate brokerage firm Ritchie Commercial, and has spent his entire career in commercial real estate. His columns appear every second Wednesday of the month. Contact Mark at [email protected].

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