A new single-asset, single-borrower commercial mortgage securitization features one of the premier office complexes in San Francisco’s South Financial district.

OMPT 2017-1 MKT is a $975 million transaction featuring notes secured by a refinanced mortgage for the owners of One Market Street, a 1.58 million square foot Class A complex located on the city’s West side near the San Francisco Ferry Terminal.

One Market Plaza’s tenants include Google, Capital Research, software firm Autodesk and the Morgan, Lewis & Bockius law firm.

The four-building complex (including a pair of 28-story and 42-story office towers) is owned by New York-based Paramount Group and Blackstone Property Partners, L.P., who will share a $44.5 million equity cashout from the new seven-year, interest-only mortgage.

Kroll Bond Rating Agency and Standard & Poor's have each assigned  a preliminary ‘AAA’ structured finance rating to the $463.7 million Class A notes tranche included in the six-note offering.  

The loan was originated by Goldman Sachs, Barclays, Deutsche Bank and Morgan Stanley.

Sponsoring entity Paramount Group Operating Partnership will retain a $51.9 million horizontal residual interest for risk-retention compliance purposes. Paramount has owned a majority stake in the office complex since 2007.

One Market Plaza is within San Francisco’s largest office market in the downtown core area, and commands rents far above the local average for its two-tower campus. While neighboring Class A rents in downtown San Francisco are at $59.31 per square-foot gross, One Market Tower has achieve 97.2% occupancy for leases with 54 tenants who pay an between $81.19 and $84.85 per square foot for the two office towers (Steuart and Spear) on its property.

The South Financial vacancy rate of 5.5% is one of the lowest in the nation for a central business district submarket, according to S&P; however, the large amount of available sublease space more than doubles that to 10.6%.

Its largest tenant, Capital Research, recently renewed a lease for its 101,708 square-foot space for $95.70 first-year rent. (Google pays $91.08 a square foot for the more than 278,000 square feet it occupies in the waterfront complex).    

KBRA has estimated net cash flow of $76.8 million (a 10% haircut from the issuer’s own NCF projections) that provide a debt-service coverage ratio of 1.92x with the mortgage carrying a 4.03% coupon.

Factors behind One Market Plaza’s strong mortgage performance features is not only from the high-demand of the plethora of Bay-area tech companies, but the city of San Francisco’s own restrictive planning policies on limit competition from potential new office-development competition. Only 875,000 square feet of new office space is permitted to be approved annually, with a current backlog of 12.6 million square feet already proposed or planned within the city.

According to KBRA, only 3.8 million of commercial square footage was under construction as of the third quarter of 2016 – with most (2.6 million sf) pre-leased in the South Financial district. But 1.7 million square feet in newly constructed office space is scheduled to go online in the CBD submarket by 2019, a boost of 6% of the total leasable space in the submarket, according to S&P.

Besides the cash-out equity payment, the new mortgage was used to retire existing debt of $840 million, which was on a balance-sheet loan from a foreign bank syndicate of German institutions Landesbank Baden-W rttemberg and Helaba.

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