Week in Review: 1/23 - 1/27

A pair of property owners have put a key portion of Macy's Union Square West Coast flagship store up for sale after failing to reach a lease agreement with the department store giant.  The hardball tactic will likely force the department store chain to buy the property, pay a much higher rent to a new landlord or break apart its most profitable store outside of New York City.  Cushman & Wakefield and Eastdil Secured are looking for a buyer for 281 Geary St., a 110,000-square-foot part of the Macy’s property. The space for sale lies just to the right of Macy’s grand Geary Street entrance. It originally consisted of two modest, 55,000-square-foot structures — known as the Allen and Bally buildings — that were incorporated into Macy’s in 1998 during a comprehensive renovation and expansion of the store. The expansion added 121,643 square feet to the 694,805-square-foot retail center and gave shoppers a main entrance from Union Square with the now-familiar, five-story, concave glass Geary Street façade.  Each of the two properties is subject to a lease with Macy’s set to expire at the end of 2015. After that, Macy’s does not have any options to extend its lease.  If Macy’s does not buy the building or agree to a new market-rate lease, the department store would be responsible for “restoring” the two eight-story buildings to their original condition. That could prove difficult. Macy’s renovation completely integrated the properties into the rest of the department store. It included an expensive top-floor build-out for the Cheesecake Factory and elevators that whisk dinners up to the restaurantBrokers familiar with the situation say that Macy’s is currently paying far below-market rate and that the property owners — two separate family trusts that have owned the property for generations — unsuccessfully tried to negotiate a new lease. Macy’s owns the rest of the parcels that make up its Union Square store. Rents on Union Square can range from $300 to $500 a square foot for small, ground-floor-only boutique space to $50 to $80 a square foot for large multi-story space. If the Geary Street buildings are sold, it’s difficult to surmise what the property would command on the market. During the top of the last economic cycle in 2007 and 2008, 400 Post St. sold for $1,700 a square foot and the small Chanel store at 135 Maiden Lane traded for $2,200 a square foot. The most recent sale in greater Union Square was 800 Market St., which sold for $1,087 a square foot. But all of those buildings had high rents in place and the prices were driven by existing cap rates, the rate of return of an investment property based on expected income and operating expenses. (SF Business Times)

Across San Francisco, top hotel properties are transforming their in-house eateries into cutting-edge venues where even locals choose to eat.  Gone are references to the hotel name. Gone, too, are white tablecloths and hushed, synchronized service. Even the ritziest of hotels, including the Ritz-Carlton San Francisco, want to become a little more hip, a little more casual, a little more relevant, a lot more inviting — all without sacrificing quality or service.  Some of these makeovers are to update tired decors. Almost all are to keep pace with changing tastes in fine dining, where people will pay for top-shelf ingredients, wines and cocktails, but do not want to invest three hours of their lives.  Perhaps the greatest example of this hotel restaurant shakeup has taken place at the Ritz-Carlton San Francisco, where its venerable and Michelin-starred Dining Room has made way for of-the-moment Parallel 37.  Ron Siegel remains executive chef at Parallel 37, but everything else has changed. Being a top-rated special occasion destination isn’t necessarily a recipe for success, since special occasions are by definition rarities. Indeed, most hotel restaurants that have adapted to keep pace with the city’s changing dining scene report business gains.  The more casual Parallel 37 is open seven days a week for dinner and lunch instead of dinner only five nights a week. Traffic to the 146-seat restaurant has doubled since the new restaurant opened in mid-December, and Salcido expects another bump when the hotel opens its remodeled lounge on Jan. 28. All are part of a multimillion-dollar renovation that included the hotel fitness center. (SF Business Times)

The amount of space owned or leased by Google Inc. in Mountain View grew by 67 percent last year.  Google added some 2.9 million feet of space, the company said Thursday in a regulatory filing.  That gives the Internet giant a total of about 7.2 million square feet of office space in the city. (SJ Mercury News)

The much-hyped revival of Mid-Market didn’t come fast enough for David Addington and his company Fair Market Properties.  Fair Market Properties, which bought 1028-1056 Market St. in 2004 for $6.4 million, filed for Chapter 11 bankruptcy protection on Jan. 18, according to public documents. Addington owes about $4 million to East West Bank.  The loan originally came from United Commercial Bank, which banking regulators shut down and sold to East West Bank in November 2009. Addington said East West Bank has been unresponsive to his efforts to renegotiate the terms of the loan. “It was easier to borrow money in 2004 than it is to pay it back today,” said Addington, who said he is hoping to hold on to the property.  Other creditors holding (unsecured) claims include: Geo-Peg Investments ($600,000), Heller Manus Architects ($32,400), Duane Morris ($30,000), MHC Engineers ($25,700), and PG&E ($20,000).  The bankruptcy filing doesn’t impact the Warfield Theater and adjacent office building at 988 Market St., which Addington owns through a separate limited partnership. That property is on the market with Marcus & Millichap. Addington bought the Warfield properties for $10.5 million in 2005.  Starting in 2004 -- long before Mid-Market was trendy -- Addington was one of the city’s more vocal champions of the neighborhood. While some of his dreams fell flat -- a two-story Foreign Cinema off-shoot in the Warfield Building, a theater and arts district funded by a special advertising -- his spirit is very much alive in Mayor Ed Lee’s redevelopment plans for the area.  (SF Business Times)

The Santa Clara City Council late Tuesday night rejected petitions seeking a referendum to overturn an $850 million loan to help fund the San Francisco 49ers' planned stadium in the city.  The council voted 5-2 to reject the petitions. The issue may now be headed to court. (SF Chronicle)

The Swig Co. and joint venture partner Angelo, Gordon & Co. have sold One Beach Street, a 97,000-square-foot office building in the North Waterfront area of San Francisco. The buyer, San Diego-based REIT American Assets, paid approximately $36.5 million for the property.  The Swig Co. acquired One Beach Street in an all-cash transaction in April 2008 with the intention of recapitalizing the asset and stabilizing the property’s cash flow before selling to an investor with a longer-term investment horizon for the building.  After forming the joint venture with Angelo, Gordon in the fall of 2008, The Swig Co. refinanced the property and negotiated long term, value add leases with the property’s major tenants, which include SKYY Spirits, SB Architects, and Alliant University.  Built in the 1920s as the West Coast headquarters and manufacturing facility for the Otis Elevator Co., One Beach Street is 100 percent leased. The building sits across from Pier 39 in an area of the city that promises to be a focal point during the 34th America’s Cup and trials starting in San Francisco this year. (SF Business Times)