Two SF tower projects face troubles amid weak downtown economy

Hines, a premier developer behind Salesforce Tower and other prominent San Francisco buildings, has run into problems with two downtown high-rise projects amid The City’s sluggish post-COVID-19 economic recovery .

A Hines-led joint venture has let die an option to develop one publicly owned property in the South of Market area, for which it had proposed a 47-story residential tower, a townhome building and a mid-rise building which together would have a range of ultra-luxury to below-market-rate residences.

The company also did not pay a $5 million penalty for missing a completion deadline for an 800-foot-tall office, condominium and hotel tower that has yet to break ground — a reflection of challenging market conditions that include reduced corporate office footprints, notably that of Salesforce.

It is a marked turn in the fortunes of one of San Francisco’s major developers, an international company that has been active in The City for more than 50 years.

The two projects combined would deliver around 850 units of housing — a significant portion of which would be below-market-rate units, a precious resource in a city that has become unaffordable for many.

Hines has pursued the two developments in the Transbay redevelopment zone for much of the last decade through F4 Transbay Partners, a joint venture with Urban Pacific Development and Broad Street Principal Investments, an affiliate of Goldman Sachs.

Most recently, on June 1, the partnership did not make a $115,385 payment to the Office of Community Investment and Infrastructure — the San Francisco Redevelopment Agency’s successor — to extend an option to develop Block 4, a plot of land between Howard, Main, Tehama and Beale streets. The purchase price was to be $6 million, and 45% of the units were to be affordable.

“Hines acknowledged they did not make the option payment, which means they no longer have an exclusive option for the development of Block 4,” said Thor Kaslofsky, executive director of the Office of Community Investment and Infrastructure.

“Although we are in communication with Hines, OCII is taking a strategic review of the block to see how best to maximize the affordable and development capacity of this attractive East Cut neighborhood site,” Kaslofsky said.

For Block 4, Hines had proposed a 47-story tower with ultra-luxury condominiums, along with luxury and below-market rental units; a 20 unit townhome building; and a 16-story building with below-market-rate housing that would be developed with Mercy Housing California.

Doug Shoemaker, president of Mercy Housing California, said the potential for housing is strong, and his organization hopes to remain involved.

“We think it’s a great site, and hopefully a great housing site for Mercy and Hines,” Shoemaker said.

The expiration of the Block 4 option followed the joint venture’s failure to pay a $5 million installment of a potential $70 million penalty for missing a December deadline to complete construction of an 800-foot-tall office, condominium, and hotel tower on a nearby plot of land known as Parcel F.

Hines bought the parcel in 2016 for $160 million from the Transbay Joint Powers Authority. The envisioned tower would connect to the 5.4-acre park atop the transit center.

The developers had been pursuing approvals for Block 4, including meeting a 45% affordable housing requirement. However, with economic conditions deteriorating, the company sought modifications to the project, including a reduced affordability requirement, which the company said would make it more feasible.

For Parcel F, Hines announced in 2018 that Salesforce had signed a lease for all of the project’s office space. Salesforce, however, has scaled back its use of office space and is no longer part of the project.

Even with San Francisco’s downtown economy in a post-pandemic slump , Hines announced in 2021 that Rosewood Hotels & Resorts had been selected to operate an ultra-luxury hotel on the site, with an opening date projected for 2026.

The significance of the F4 partnership’s lapses was not clear. Though Hines put Parcel F up for sale last summer, the company provided a statement indicating it was still dedicated to both projects. A Goldman Sachs official declined to comment, and inquiries to Urban Pacific received no responses.

“We’re actively collaborating with the city and our partners to advance the visions of Block 4 and Parcel F amidst challenging market conditions,” the Hines statement read. “As an investor in San Francisco for over five decades, we have a long track record of successfully navigating through difficult economic cycles. We remain committed to these projects and are incredibly optimistic about San Francisco’s future.”

The two Transbay projects are in a roughly 40-acre redevelopment plan area that once contained the now-demolished Embarcadero Freeway and ramps connecting buses to the former Transbay Terminal.