REAL ESTATE NEWS

In recent months, an increasing number of Class B office assets have either entered default or moved through foreclosure. This activity, taken place between late 2025 and early 2026, has been concentrated along Market Street and Union Square, where valuations had fallen sharply and leasing demand remained weak. Yet, that's creating opportunities for some investors.

Some examples of recently troubled office properties in San Francisco:

• 580 Market Street — a six-story, 35,000-square-foot Class B building whose $15.7 million CMBS loan matured in June 2025 without repayment. A notice of default followed in October and by early 2026, Rialto Capital was pursuing foreclosure. The building's appraised value had fallen to $8.9M—roughly 63% below its 2015 sale price—with occupancy down to 53% as major leases rolled.
• 180 Sutter Street and 222 Kearny Street — two adjacent Union Square offices totaling 145,000 square feet sold at a foreclosure auction in December 2025 for $5M, a dramatic drop from their combined $74.4M transaction price in 2019. The $47.5M CMBS loan had defaulted in April 2024 and mid-2025 appraisals valued the pair at just $18.3M.
• Central Tower — CIM Group signaled in early 2026 that it was preparing for a consensual foreclosure after defaulting on a $98M CMBS loan tied to the 165,000-square-foot property. The loan entered special servicing following Unity Software's departure, with lenders expecting to take ownership by late 2026.

Together, these cases illustrate a concentrated period of distress in Q4 2025–Q1 2026, driven by falling valuations, expiring leases and persistent remote-work-related vacancy. They also set the stage for a new investor playbook: acquiring debt, foreclosing and recapitalizing assets with long-term potential.

Against this backdrop, the recapitalization of 600 California Street shows how investors are selectively targeting high-quality buildings caught in the same debt-market turbulence.

Lone Star Funds acquired the tower through a foreclosure process after purchasing the underlying debt—mirroring the mechanics seen elsewhere in the city. But unlike the distressed Class B assets on the market, like 180 Sutter Street, 600 California, which recently defaulted on a loan, is a 360,000-square-foot Class A tower with a long track record of outperforming the market.

Harvest Properties Director Chris Trotier noted that the building has historically maintained 90%+ occupancy since its 1990 construction, dipping only during periods of major market stress or ownership transition. Even during downturns, he said, the tower has "traditionally managed to outperform the market."

Immediately after the foreclosure acquisition, Lone Star formed a joint venture with San Francisco-based Harvest Properties. Under the agreement, Harvest receives an equity stake and serves as the operating partner, with the JV launching a capital improvement and repositioning plan.

This structure—fresh equity paired with active local management—reflects a broader investor strategy emerging in San Francisco: use foreclosure to reset the capital stack, then reinvest to position the asset for recovery.

The joint venture is rolling out targeted upgrades to strengthen leasing momentum as demand returns to the Financial District. Planned improvements include a renovated lobby and exterior plaza, a 10,000–15,000-square-foot amenity floor, a new exclusive roof deck and market-ready upgrades to vacant floors.

Harvest Partner Preston O'Connell emphasized that the building's side-core design and stepped massing already provide panoramic views for roughly 80% of the tower—an advantage the repositioning plan aims to amplify.

600 California Street is not distressed in the same way as the Class B buildings moving through foreclosure. But its path into new ownership—via debt acquisition and foreclosure—places it squarely within the city's broader trend: investors using foreclosure as an entry point into San Francisco's office market.

Where some buildings are selling at steep discounts, others—like 600 California—are being recapitalized to compete aggressively in the next phase of recovery. The common thread is clear: foreclosure has become a central mechanism for resetting values, attracting new capital and reshaping the city's office landscape.

Source: GlobeSt/ALM