A premium office building in San Francisco's financial district received no bids when it went up for auction last week, contradicting claims that the city's commercial real estate market has recovered from the pandemic. 

The 20-story, 360,000 square foot Class A tower at 600 California Street was valued at $320 million in 2019, but it was appraised at $109 million in 2024 - a 66 percent drop in just five years.

Three years ago, the former building's anchor tenant, WeWork, stopped paying rent. The building's owners, WeWork investment arm WeCap and Rhone Group, were unable to keep up payments on a $240 million loan issued by Goldman Sachs.

A private equity group called Lone Star Funds stepped in and purchased the building's debt from Goldman Sachs in January for $130 million. 

Lone Star Funds then took ownership of 600 California Street through foreclosure by placing a $216 million credit bid on the tower. 

A credit bid allows creditors to use debt from a borrower to purchase collateral in cases of bankruptcy or foreclosure. The private equity group essentially purchased the debt so it could gain ownership of the office tower at a discount. 

At the auction last week, there was a final opportunity for another party to purchase the building by outbidding Lone Star Funds. 

But the office has a low occupancy rate, which made it impossible to guarantee that the hefty loan could be repaid, making the purchase too risky for prospective buyers. 

As a result, the private equity group officially took over 600 California Street for an estimated $361 per square foot.

In 2019, WeCap had purchased the building for around $900 per square foot. WeCap was created as WeWork's in-house investment vehicle that would allow the company to move beyond leasing office space and begin owning it instead. 

At the time WeCap was created, WeWork was enormously profitable. The founders, Adam Neumann and Miguel McKelvey, had molded the company into the country's most valuable startup, with a private valuation that peaked at $47 billion.

The company's business model of signing ten to 15-year leases, remodeling offices into flexible coworking spaces and then subleasing them at a premium was a success.

But when the pandemic hit and office occupancy rates plummeted, WeWork no longer had a steady income stream but was still locked into extended leases that forced the company to continue paying rent. 

WeCap also struggled to pay off mortgages on the properties it had purchased, as the rent payments from those hollowed-out offices slowed to a trickle.

At 600 California Street, the company was faced with a dual crisis, as it was no longer able to pay itself rent and make mortgage loan payments. 

WeWork was the building's anchor tenant, taking up 200,000 square feet which was more than half of the building's space, so revenue from the building had essentially dried up. 

Goldman Sachs sued WeCap and Rhone Group in 2023 after the partner companies fell behind on mortgage payments, and WeWork filed for bankruptcy shortly after. 

San Francisco commercial broker Charlie McCabe told the San Francisco Chronicle that WeWork's '2023 bankruptcy implosion continues to echo in San Francisco.'  

He added that the building's recent foreclosure sale 'dispels the perception that the local commercial property market has completely bounced back.' 

McCabe also noted that five other 'troubled commercial properties over 250,000 square feet in size' in San Francisco have changed ownership just this year. 

The Daily Mail has reached out to WeWork and Lone Star Funds for comment.