Deal to buy downtown San Jose office towers points to feeble market

Deal to buy downtown San Jose office towers points to feeble market

SAN JOSE — A high-profile office complex of two towers in downtown San Jose has been sold for a huge loss compared with its prior price in a deal that is a fresh reminder of the feeble state of the Bay Area office sector.

The property is 111 Market Square, a downtown San Jose office center that was bought for $34.2 million, according to documents filed on Feb. 29 at the Santa Clara County Recorder’s Office. The two-building complex is located at the corner of North Market Street and West St. John Street.

Elevated view of 111 Market Square, a two-tower downtown San Jose office complex totaling 325,000 square feet, addresses of 111 North Market Street and 111 West St. John Street. (Google Maps)

The buyer is an entity headed by George Mersho, the Shoe Palace chief executive officer. In recent months, Mersho led a different entity that bought a different downtown San Jose office property — also for far less than its prior purchase price.

The just-purchased 111 Market Square office center, which totals about 325,200 square feet, was previously bought in 2019 by an affiliate of Rubicon Point Partners, which paid $141.4 million at that time, county real estate records show.

111 Market Square, a 325,000-square-foot two-tower office complex in downtown San Jose, with addresses of 111 North Market Street and 111 West St. John Street. (George Avalos/Bay Area News Group)

The deals mean that Mersho’s group paid a jaw-dropping 77% less than the price paid about five years earlier by the latest transaction’s seller, Rubicon Point.

One of the towers in 111 Market Square is 12 stories high while the other tower is 10 stories, according to a marketing brochure circulated by CBRE commercial real estate brokers Chris Shepherd, Vincent Scott, Michael Grado, Matthew Taylor and Rochelle Imani.

In December 2023, a different entity headed up by Mersho paid slightly under $23.8 million for the 303 Almaden office tower, an 11-story highrise that totals 157,500 square feet. That price was about 70% below the $80.2 million that the seller paid for the tower in 2017.

The deals mean that Mersho, the Shoe Palace’s top boss, has suddenly become a big-time player in downtown San Jose commercial real estate.

The transactions, however, also make it clear that property values are slumping for office buildings throughout the Bay Area and that San Jose isn’t immune from the weakness.

Here are other signs of a frail office market in the Bay Area:

— In the fall of 2023, a San Francisco office tower at 550 California Street was bought for $40 million, or a 75% discount from its prior price.

— Multiple other San Francisco office highrises are being offered for sale, or have been sold, for a fraction of their previous values.

— In December 2023, an Oakland office complex at 303 and 333 Hegenberger Road toppled into default on a $37.2 million loan.

— A downtown Oakland historic tower at 1440 Broadway was seized by its lender in July 2023 due to a $25.5 loan delinquency.

— Concord Corporate Centre, a two-building Concord office complex at 1320 and 1390 Willow Pass Road, was bought in December 2023 for $20 million, which was 68.5% below its prior purchase price in 2017.

This week’s deal involving the office towers in downtown San Jose suggests that office building prices have retreated below where they were nearly a decade ago.

These are some key benchmarks that demonstrate the deterioration in downtown downtown San Jose’s office market.

— The latest price for 111 Market Square shows the George Mersho-led group paid about $105 a square foot for the property. In 2019, the two-building complex was bought for $435 a square foot. In 2016, the property fetched a price of $199 a square foot. Put another way, the 111 Market Square complex is worth less than it was eight years ago.

— The price that Mersho’s group paid for the tower at 303 Almaden Boulevard, $151 a square foot, is far below the building’s value at the time of that tower’s prior purchase in 2017. The 2017 deal was at that time a record high for downtown San Jose office buildings, $509 a square foot.

At the time of the prior deals for the two downtown San Jose office properties a few years ago, the city’s downtown was flying high.

Real estate experts brimmed with confidence that tech companies and developers alike had finally spotted the opportunities and advantages of the urban core of the Bay Area’s largest city.

In 2020, however, the coronavirus erupted, bringing with it a plague of economic woes that torpedoed office buildings, hotels and retail properties.

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The fundamentals that helped office prices and rents rocket to previously undreamt-of heights in the Bay Area began to crumble in 2020 with the coronavirus outbreak and the government-ordered business shutdowns to combat the spread of the deadly virus.

Even worse, tech companies starting in 2022 began to chop Bay Area jobs in big numbers, a downsizing that also curbed their respective appetites for office space.

Office vacancies rose and rents flattened, unsettling trends that helped to undermine the values of Bay Area office buildings.

Now, potential buyers and current owners of office buildings throughout the Bay Area are both engaged in full-scale expeditions to attempt to find the bottom of the region’s reeling office market. It’s unclear whether the intense endeavors have discovered the trough.

What is clear is the two-building 111 Market Square office complex that Mersho’s group now owns is deemed to be a top-notch Class A property, according to CBRE’s marketing brochure.

Rubicon Point Partners undertook major upgrades to the lobbies and individual offices and also revamped a connecting courtyard in the property, which has ground-floor restaurant and merchant spaces.

The CBRE brokers also touted the location of the office center next to San Pedro Square.

“Market Square enables tenants to seamlessly transition from office hours to happy hour without missing a beat,” the CBRE brochure stated. “Enveloped by bountiful urban living options, chef-driven restaurants, craft coffee cafes, happy hour hot spots and diverse cultural destinations, tenants can experience a hub of activity just steps from the office.”