Related California has found a partner willing to help build the skyscraper it pitched in San Francisco last year. The behemoth real estate firm last week announced an agreement with Los Angeles-based McCourt Partners to co-develop 530 Sansome: 41 stories with 375,000 square feet of office space atop a luxury hotel in Jackson Square. 

They’re not the only ones. San Francisco developer Dan Kingsley is teaming up with private equity investor Jay Yang to restart the abandoned Oceanwide Center. Hines and South Korea’s national pension fund wants to knock down PG&E’s former headquarters at 77 Beale St. in order to erect the city’s tallest building. And Amazon’s landlord Prologis just pitched what would be the city’s second-tallest building atop the 4th & King Caltrain station. 

Based on those projects getting announced around the same time, it appears that the race is on to build San Francisco’s next great skyscraper. And it is, as evidenced by Related and McCourt’s new partnership. Capital is being raised. Lenders are underwriting risk. And architects are submitting detailed plans to the city. 

It’s an exciting time for those in the commercial real estate industry who have had to weather years of financial pain caused by the pandemic. One way to frame this supposed development boom is that San Francisco’s reputation is changing positively among outside investors. 

But why more offices when a third of the city’s roughly 90 million square feet of space remain vacant after the pandemic?

Jordan Lang, president at McCourt Partners, said those numbers don’t apply to what the partners are trying to accomplish with 530 Sansome. 

“Even with high vacancy rates, demand is increasingly concentrated at the top end of the market,” Lang said, adding that McCourt has been watching San Francisco “very closely” over the last year and believes the momentum downtown has been trending in the positive direction. 

The data bear that out. San Francisco’s office vacancy rate is falling after plateauing at 34% last year, and the market for the best skyscrapers in the city is a lot tighter, according to Cushman & Wakefield. 

The firm tracks 15 top-of-market buildings in the central business district that are either new or completely renovated and have top floors with 360-degree views. Only 9.4% of that space was directly vacant as of the first quarter of this year; half of that is at One Market Plaza, which saw the likes of Google and Visa depart last year amid the building owner’s financial woes. 

One of San Francisco’s most recognizable office towers, 101 California, was recently valued at $1 billion after DivcoWest purchased a stake in January.  

Therefore, the bet these skyscraper developers are making is that there is going to be more demand than supply for the best-in-class properties. And that is pretty much true across the history of commercial real estate in New York: See JPMorganChase’s move (opens in new tab)into the new skyscraper constructed at 270 Park Ave. or Citadel committing to anchor a planned 62-story building at 350 Park Ave. (The Ken Griffin-led firm is reportedly considering backing out of that deal (opens in new tab) in response to New York’s proposed pied-à-terre tax.) 

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The story has played out similarly in San Francisco. Uber relocated from downtown to a newly constructed complex near Chase Center shortly before the pandemic and subsequently subleased half of that space to the world’s fastest growing companyd: OpenAI. 

The San Francisco Giants built an office park called Mission Rock that, after opening last year, was leased by Visa, the Golden State Warriors, Coinbase, and Nvidia. 

Generally speaking, the newest stuff on the market tends to get leased first. 

But there are failed bets too. Brookfield opened the 5M office tower at 415 Natoma St. in 2022, and the 22-story building is more than 90% vacant. To get the construction financed, the developer secured a commitment from Zendesk to pre-lease most of the building, but the company backed out during the pandemic. As a result, Brookfield handed the building over to new owners this year through a deed in lieu of foreclosure. 

Experts say Related, McCourt, and these other developers will have to prove to investors and lenders that they can lease up their new buildings within three to five years of completing construction. 

The competition will be fierce. In addition to 530 Sansome, there are 20 developments in the pipeline that could add 20 million square feet of office stock to the city, according to Cushman & Wakefield.

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Gino Canori, president and CEO of Related California, told The Standard that his company has been “actively talking” to office tenants for pre-leasing. “We see the opportunity to provide brand new, modern office space with floor-to-ceiling glass, modern amenities and services,” he said. 

“All the things that top-tier tenants are looking for but can’t find in San Francisco.”