San Francisco Gets a $1 Billion Bet That Workers Will Return
Biz Carson, May 17, 2023
Michael Shvo is redeveloping the landmark Transamerica Pyramid in hopes a luxe revamp will aid in the area’s revival.
The Transamerica Pyramid in San Francisco. Photographer: David Paul Morris/Bloomberg
The 48th floor of the Transamerica Pyramid used to hold a conference room with panoramic views of the San Francisco Bay. Today, there’s a hollowed out construction site. By the end of the year, it will be a 45-seat sky bar that will open only for the tower’s clientele.
It’s an upscaling transformation for the 50-year-old San Francisco landmark — and a bold, costly investment in a real estate market now known for its empty buildings.
Michael Shvo. Photographer: David Paul Morris/Bloomberg
At a time the downtown is struggling with a nearly 30% office-vacancy rate, the new owner of one of the city’s most recognizable towers is doubling rents and investing $400 million in renovations at the three-building complex. For Michael Shvo, who led an investor group that bought the Transamerica Pyramid in 2020, the moves are a bet on both the resiliency of San Francisco and the prospect that high-end space and amenities will lure in workers who’ve grown accustomed to the comforts of home.
“The whole idea that people are trying to write off San Francisco is total nonsense,” Shvo said. “It’s one of the most important cities in the country and this is the most important building on the West Coast.”
Since renovations were announced, five of the leases signed at the building have been for $200 to $250 a square foot, according to Shvo, more than twice the average for San Francisco’s top-tier buildings. All of the deals have been at over $120 a square foot, the developer said.
The financial district of San Francisco. Photographer: David Paul Morris/Bloomberg
The 853-foot (260-meter) Transamerica Pyramid sits at the edge of San Francisco’s financial district, an area that’s been hit hard by the slow return of workers after the Covid-19 pandemic. Those issues are now being compounded by layoffs in the tech industry and the failure of two regional banks that serviced it. An exodus of retailers, including long-standing fixtures like Nordstrom, have added to a sense that the city’s core is facing a doom loop — the prospect that flailing economic fortunes will trigger even more departures and create an ever-worsening situation.
“All of this together is a perfect storm, but it’s also a perfect opportunity to buy real estate,” Shvo said during a tour of the Transamerica tower, standing in a 36th floor leasing exhibit wearing his signature black Armani T-shirt.
Shvo is perhaps one of the most bullish people on San Francisco’s future. He paid $650 million for the tower and two other buildings, with financing from Deutsche Finance America and German pension fund Bayerische Versorgungskammer, reaching a deal just before the pandemic and then closing in October 2020. The developer — who got his start as a New York real estate agent marketing splashy deals before launching his own firm, disappearing from the scene after the financial crisis and re-emerging in the art world, where he pleaded guilty to tax fraud — has been on a buying spree in recent years, with $4.5 billion spent on real estate purchases and renovations, and another $2 billion of properties under contract.
Growing up in Israel, Shvo first visited San Francisco in 1979 as a 7-year-old and likes to brandish a drawing he claims he made at the time of him standing next to the Transamerica Pyramid.
“This was, for me, my American dream,” Shvo said.
Shvo stands next to the Transamerica drawing he did when he was a child. Photographer: David Paul Morris/Bloomberg
That dream now includes overhauling the space in a renovation led by Foster + Partners, the architecture firm that designed Apple Inc.’s campus in Silicon Valley. There will be an on-site gym and wellness center with a view of Coit Tower. Another floor will have a coffee bar and “lounging library” to give people a place to work and relax outside of their offices. In the lobby, there are plans for a cafe, florist and gift shop, along with a restaurant for clientele of Core, a members-only club that has signed a 20-year-lease to take over three floors of the building.
The push for upgrades is a playbook landlords all over the country are betting on to fill empty buildings in the age of hybrid work. But it’s unclear if outfitting offices with swank amenities will have results, especially in a city with a large amount of subleasing space up for grabs.
The San Francisco market has been flooded with office space as tech companies have embraced flexible work and laid off employees. Salesforce Inc. is giving up all of its space in its Salesforce East property and has subleased other floors in Salesforce Tower, the six-year-old skyscraper that supplanted Transamerica Pyramid as the city’s tallest and skyline-defining building. Pinterest Inc. recently joined Meta Platforms Inc. and Lyft Inc. in scaling back square footage in the city.
A “For Lease” sign in the Financial District. Photographer: Jason Henry/Bloomberg
There is some evidence that high-end and highly amenitized buildings will withstand San Francisco’s sluggish recovery: Lower-quality buildings are extremely vacant, but prime buildings are still doing well, said Colin Yasukochi, executive director of CBRE Group Inc.’s tech insights center in the city.
The vacancy rate for trophy buildings is generally “around 10% or less,” he said. “They tended to house non-tech and more financially strong and stable companies, so they didn’t reduce their space.”
The effective rents at “cream of the crop” buildings in San Francisco’s central business district have stayed very close to their pre-pandemic rates at the expense of the lower-tiered Class A buildings, which have seen prices drop amid a flight to quality, according to Robert Sammons, a research director at Cushman & Wakefield.
What Shvo’s selling is even above that. He won’t reveal the names of new tenants at the Transamerica tower, but says it’s largely financial and venture firms, along with a climate-related business. It’s already home to businesses such as insurer Northwestern Mutual and law firm BakerHostelter.
Still, the rent increases have caused turnover for existing residents who are leaving the building for smaller office footprints and cheaper rents. Investment advisory firm Callan plans to leave its space later this summer, according to people close to the matter. The company declined to comment. The pyramid is around 30% vacant, in line with San Francisco’s average, albeit some of that is due to the construction.
Renovations to the Transamerica Pyramid, 2 Transamerica and an adjoining redwood park are expected to be completed by the end of this year. Shvo will then start work on 3 Transamerica, which is getting its own expansion and futuristic facelift from Foster + Partners, in early 2024 to bring even more workers to the block.
A model of 3 Transamerica. Photographer: David Paul Morris/Bloomberg
“Over the last 10 years, there’s quite a few owners that just haven’t amenitized their buildings as much as they should have,” said Chris Roeder, the Jones Lang LaSalle Inc. broker leading leasing of the site for Shvo. “In a post-Covid world, if you’re not working from home, you want to be at a place where you can get a lot of the same things.”
To Shvo, home versus office isn’t even a contest — unless your house also has a treadmill 28 floors up with views of Coit Tower, he said with a laugh. Instead, he wants it to feel like the destinations he’s used to developing, like the Raleigh hotel in Miami Beach or the Mandarin Oriental residences on New York’s Fifth Avenue.
He sees it as equally important to attract non-office workers back to the Transamerica block, making the building more of a destination to tourists, workers and locals alike.
“This will bring life into downtown,” Shvo said. “And I hope it starts the next 50 years of downtown, because I don’t want to be here alone.”