A Brief History of Our Evolving Cities:
For much of my career, I spent most of my time meeting with clients and prospects at their offices, representing our investment firm to financial companies, banks, insurance companies, and brokers in various cities. Generally, I worked out of two offices, one in New York. The other in San Francisco. I want to introduce you to those two cities as I saw them.
First Office in New York’s Rockefeller Center
I like to arrive early to the office in Rockefeller Center when the only ones around are the gaggle outside watching the taping of the Today Show and the various cleaning crews. It was well before all the tourists came, but fortunately, the coffee shop was open as always. A cup of Joe, and I was ready for the day.
Rock Center, as the locals know it, is a magical place. There is a unique quality to the light caused by that weathered Indiana Limestone, which has mellowed over the years to a gray/beige patina that gives the center a wonderful glow. It’s been nearly a century since John D. Jr., son of the famous oil magnet, first decided to build what has become the heart of Gotham. The time was the height of the Roaring 20s, although the project would not be completed until the midst of the Great Depression.
It was just 15 years after America’s Central Bank, the Federal Reserve, was founded. And therein lies much of the story. You see, Rockefeller Center represents the old America, a time when the country was an agricultural and industrial powerhouse but not yet a financial one. It was just after the 19th Century period of the “ Robber Barons” period, but at least one of those Barons remained, John D Rockefeller Jr.
These families had acquired enough wealth to finance even the most ambitious real estate projects, like Rockefeller Center. However, in the case of John D. Rockefeller Jr., he utilized all the financing strategies available to him, leasing, instead of purchasing outright, the property from Columbia University. He took short-term bank loans to manage cash flow. But by and large, Rockefeller relied on his vast family fortune to build this magnificent edifice.
The business was personal in those days, who you knew was vital in getting a “deal.” The concept of a Rockefeller Center began when a close friend, Ivy Leadbetter Lee, was invited to a presentation in mid-1928 on selling some property in mid-town. The Metropolitan Opera was looking for a new theater. They had outgrown their old Opera House and were looking to move.
Lee, whose background was in Public Relations, immediately saw an opportunity for Rockefeller to create a tremendous multi-use facility that could become a focal point of the City. It took some convincing, but eventually, Lee persuaded Rockefeller to begin the project and even got Rockefeller to lend his name. Plans were finalized two years later, and construction on the “Rockefeller Center” began.
So it was that the entire project rested on the shoulders of just one man, John D. Rockefeller Jr. Today, those first completed buildings are approaching 100 years in age. While the design and appearance of the buildings remain as fresh as when they were built, the methods of construction and certainly that kind of financing have long passed. Today, no one would consider self-financing a major commercial project like the “Rock.”
Next, San Francisco’s SoMa District
The other office I worked out of was in the SoMa section of San Francisco. SoMa, or South Of Market (Street), has been the “cool,” up-and-coming section of a, until recently, revitalized West Coast City.
However, when I began working from this office in the late 1980s, San Francisco was still the “stuffy old” neighbor to the north of Los Angeles. LA was vibrant and growing, driven principally by Holly Wood. It was where young professionals migrated, and everyone wanted to be “seen.” In contrast, San Francisco was the home of staid, conservative banker types (my clients, LOL!).
That all changed when the Tech Companies in Silicon Valley, just to the south, decided that they’d like to have a more urban setting. There was a new way of developing urban properties, and the best example was just a couple of blocks from my old office. It’s the Salesforce Tower. The methods used to finance and construct this gleaming steel and glass skyscraper are as far removed from Rockefeller Center as you can get. As far as its high tech, “Curtains of Glass” are from traditional Indiana Limestone.
Today, no visionary put the family’s money on the line to build this towering edifice. There is no John D. Salesforce. We wondered who the final owner would be for most of its construction.
The project began as an effort by the City of San Francisco to clean up what had become a derelict area South of Market Street. It’s a vital point: the City of San Francisco sold the land. It would ease the development process, as building inspectors and permit clerks become more amenable when the “boss” is involved. You see, the City controls the permit process. Without the active consent of the City and various regulators and inspectors, this project would have never gotten off the ground.
Although construction had not yet begun, the project was still known as the (future) Transbay Tower. The date was 2007, and a group from Texas, the Hines Interests Limited Partnership, won the rights to begin building.
As it turned out, Hines owned the property for five years. During that time, they began obtaining architectural plans and approvals. It took Hines two Years (2012 to 2013) to complete the sale to Boston Properties. Boston Properties is a Real Estate Investment Trust, and the stock trades on the New York Stock Exchange.
Boston Properties then starts construction and lands a lead tenant, Salesforce. Salesforce, in turn, agrees to lease half the building and obtain “naming” privileges. And just like that, Transbay Tower became Salesforce Tower, the tallest building in San Francisco and the second largest building west of the Mississippi River.
It’s All A Speculation
The entire Salesforce Tower project was a “spec.” The City speculated that someone would come along to develop their project. Hines LP supposed that they could get the project approved and begin construction. Boston Properties imagined that they could build the building and get it rented. Even Salesforce speculated they could pay their rent for the 15-year lease term.
Making all this spicier is that most of these transactions were likely leveraged. The two principals, Hines and Boston Properties, probably used bank lines of credit to make the down payment, with a mortgage to secure the final financing. In this way, the bank, or financing company, has become a partner in the development.
As long as the lead tenant, Salesforce remains in place and meets its lease payments, everything is hunky dory. However, should Salesforce or a substantial number of other tenants falter, then the troubles begin. And those troubles affect not just the owner, Boston Properties, but all the banks and financial companies that supplied financing.
And that happened during the Great Financial Crisis of 2008–9. During that time, commercial real estate loans’ delinquency rate rose nine-fold in less than two years.
Currently, everything is working as it should down at the Salesforce Tower. However, old friends tell me that the rest of San Francisco could be faring better. Vacancies, especially for retail businesses, are skyrocketing. A city that used to have a vacancy rate of mid-single digits is now looking at up to 40% of empty store space. Shops and stores that are out of business don’t pay rent.
It’s a world in which each “partner” along the way must rely on all the rest. And, if you follow the logic, that’s how a local tragedy, like the closing of the neighborhood store, becomes a national financial crisis when up the ladder first the owner, then the lender (banks) aren’t paid.
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