When a real estate investment partnership paid $281 million for the soaring office tower at 333 Bush Street in San Francisco in June 2007, near the top of the market, the property was 75% leased. Today, the nearly 550,000-square-foot property is 65% vacant, and the owners — a partnership of Hines, an international real estate investing firm with U.S. headquarters in Houston, and Sterling American Property, a real estate investing fund based in New York — are handing it over to their creditors. The San Francisco Chronicle notes today that the forfeiture was the city's second distressed transaction involving a major commercial building in recent weeks and another sign of the growing pressures in the commercial real estate sector.
The stressed commercial real estate market is the subject of a current Knowledge at Wharton article titled, "On Shaky Ground: Commercial Real Estate Faces Financial Tremors." Falling vacancy and rental rates, and a dearth of creditors willing to help commercial real estate investors refinance loans taken out during the boom years prior to the financial crisis, are putting a tight squeeze on the business.
But, according to the newspaper's report, the owners of 333 Bush Street faced an additional twist – the surprise dissolution in September 2008 of 118-year-old law firm Heller Ehrman, which leased 250,000 square feet of the building. Though law firms have also been struggling as corporate clients cut spending in the recession, Heller Ehrman's demise appeared to be due to a flight of talent: 14 intellectual property litigators left in mid-September. Their departure, according to an October 2008 article in The Deal.com, triggered a clause in the firm's contract with its banks regarding a line of credit, which in turn led to the seizure of accounts receivables and other expenses.
The firm's dissolution contributed to another aspect of the financial crisis — unemployment. According to the report in The Deal, more than 650 lawyers and other professionals at Heller Ehrman were left jobless.