The revival of the $1 billion San Francisco tower is clouded by the lawsuit

One of San Francisco’s most iconic buildings is celebrating its reopening after a four-year, $250 million renovation meant to symbolize the city’s renewal. It’s doing so under the shadow of a lawsuit from one of its key tenants.

The Transamerican Pyramid will hold a spectacular event on Thursday with Mayor London Breed and the famous architect Norman Foster, whose firm led the renovation. It’s a litmus test not only for a center facing a record 37 percent vacancy rate, but also for developer Michael Shvo.

The Trans-American Pyramid in San Francisco.

Shvo’s company went bust last month on a Beverly Hills property and is now facing a $600 million lawsuit related to Core Club, a trendy members-only venue that was supposed to open a three-story location in The Transamerican Pyramid, with a restaurant overlooking an adjacent area. redwood park.

Instead, Core’s owner claims that Shvo has not kept his sights set on building and financing the club’s global expansion. Seeks cancellation of existing agreements and termination of lease in San Francisco.

“There is absolutely no realistic prospect of the club opening in September 2024, or ever in the near future, due to the lack of progress in building out the space,” Core’s attorney, Adam Glassman, said in a statement.

In an interview with Bloomberg, Shvo slammed the lawsuit, calling it a PR stunt to renegotiate rents. He said he has filed a motion to dismiss the case.

The Trans-American Pyramid in San Francisco is being redone in a bet that remote work will fade

Mihai Švo

Shvo, who began his career as a real estate agent in New York before launching his own firm, pleaded guilty to tax fraud in 2018 in connection with purchases including artwork and a Ferrari. Since then, he has purchased trophy properties such as the “Big Red” office building in Chicago and the Raleigh Miami Beach hotel and residences. He bought the Transamerica Pyramid and two other office buildings in 2020 with financing from Deutsche Finance America and German pension fund Bayerische Versorgungskammer — a deal expected to cost more than $1 billion between the purchase price and renovations.

Core’s absence will not affect any of the new tenant amenities, Shvo said. There is a gym on the 26th floor with views that stretch from the Golden Gate Bridge to the Coit Tower. One floor above, there is a tenant-only “outdoor lobby” with a cafe. There, people will have to transfer elevators to reach the top of the pyramid – a bar on the 48th floor reserved only for the building’s luxury clientele.

Downstairs, the new lobby has low seating, a cafe, flower shop and gift shop. It is connected for the first time to the Redwood Park outside, which has a sculpture garden by French artists Les Lalanne. Miami chef Bradley Kilgore will open two new restaurants in the neighboring Transamerica 3 building.

As the city struggles with vacant jobs, developers are “going after a segment of the market that’s different,” said JLL’s Chris Roeder, who is leading leasing for the site. “They’re looking for the best service, the best hospitality, the best accommodations.”

The 510,000-square-foot building is currently about 70 percent occupied, with an additional 185,000 square feet under negotiation, according to the developer. Several tenants leased space for more than $200 per square foot, and three recent leases ranged from $125 to $180 per square foot — about double the city average of $68.43, according to data CBRE Group Inc.

Crypto-focused venture capital firm Blockchain Capital is one of three leases signed since Labor Day, including a two-floor renewal from Wedbush and a lease from NextAxiom, a spokesperson for Shvo. However, there has also been turnover as higher rents have pushed out some existing tenants.

AI Bump

Transamerica’s top leases are an indication of the bifurcation that has divided San Francisco’s office market. While lower-rise buildings struggle to attract tenants even at discounted prices, higher-rise buildings are “healthy,” said Robert Sammons, senior director of research at Cushman & Wakefield. The average asking rent for Class A buildings was $72.28 per square foot in the second quarter, but the city’s top 15 buildings, including the Transamerica, had a premium to an average of $108 per square foot, Sammons said .

The city has struggled to demonstrate that it is not stuck in a death loop following the Covid-19 pandemic. A combination of tech layoffs, telecommuting and the failure of two regional banks have emptied the city’s core, companies like Meta Platforms Inc. and Salesforce Inc. have shrunk their office footprint and stores like Nordstrom and Whole Foods are fleeing the Union Square area amid concerns. about safety and homelessness.

However, the market appears to be stabilizing as the exodus of companies slows and new leasing activity is noted, said Colin Yasukochi, chief executive of CBRE’s technical information center in the city. The AI ​​boom is helping, with AI companies accounting for a quarter of new leasing activity in the city from 2023 to now, CBRE data shows.

“They actually occupied more normal levels of office space, more like they were before the pandemic,” Yasukochi said. “But the rest of the tech and other companies have scaled back significantly and have been very cautious about taking up additional space.”

Shvo said he sees evidence that the AI ​​boom is bringing life back to downtown, even though the Transamerica Pyramid hasn’t signed any AI startups. Pyramid will help host the Ted AI conference in October.

“It’s coming back,” he said. “Offices may be vacant, but the energy returns to the streets.”

However, Shvo is unlikely to invest further in the city or on the West Coast. The developer last month defaulted on a $200 million loan on the Mandarin Oriental apartments in Beverly Hills, which were completed in May, and is in foreclosure with the residences up for sale. He is also facing a lawsuit from his former business partner related to one of his properties in New York.

“The property group has arranged financing with JPMorgan but has instead chosen to work with the lender to market the remaining units in a bulk sale,” a spokesperson for the property group said in a statement, including Shvo, Deutsche Finance and a consortium of German pension funds. . “The decision allows the partnership to reallocate investment resources to the acquisition of new income-producing assets in anticipation of a lower interest rate environment.”

Shvo said he is now more interested in New York City and its office market than doubling down on San Francisco.

“It’s hard to buy anything in San Francisco after you own the Trans-American Pyramid,” he said. “Everything is inferior.”

Top photo: The Transamerica Pyramid in San Francisco.

Copyright 2024 Bloomberg.

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