With its Art Moderne architecture, the Pacific Telephone Building is among San Francisco's few historical trophy buildings. And Wilson Meany Sullivan paid a big price, $118 million, to put the 26-story building in its trophy case.
Transforming the 1925 building at 140 New Montgomery St. into a 118-unit condominium building will cost the San Francisco developer even more than the sale price.
The buy-in at $345 a square foot was high as Wilson Meany outbid numerous rivals at the peak of a bull real estate investment cycle. The wisdom of the deal won't be known for perhaps a decade.
"From our standpoint, this is just the beginning of the deal," said Wilson Meany managing partner Tom Sullivan. "It is more about the redevelopment than the actual deal."
The challenge facing the firm is high renovation costs that must be offset by selling the condos at a substantial price. Wilson Meany bought the building with Stockbridge Capital Partners, and they are now figuring out conversion costs while they go through the approval process. Although final costs have not been determined, Sullivan estimates it will likely cost well over $400 per square foot to transform the building.
Located in the burgeoning South of Market area, the Pacific Telephone building went through several rounds of bidding. Competitors included local powerhouses Myers Development and TMG Partners as well as Miami's Peebles Corp.
To gain the edge, Wilson Meany showed its conviction by making a large, nonrefundable deposit upfront. With its successful track record on other difficult conversions of historic properties, such as the Ferry Building and One Powell, Wilson Meany had the confidence to move forward despite the risks involved. Some had called the Pacific Telesis Building a career-maker or a career-breaker.
Seller AT&T had pulled its staff out of the building two years ago as part of a decade-long San Francisco downsizing after Texas-based SBC bought Pacific Telesis. SBC is now AT&T and its spokesman John Britton said the opening of the nearby St. Regis Hotel made the site more valuable and improved the timing for a sale. The company sold two other San Francisco buildings in 2007 as well, Britton said: 370 Third St. and 666 Folsom St.
"We wanted to optimize the asset and take the capital from it and reinvest it into our business," said Britton. "We monitored the economic conditions in the San Francisco market and saw it was recovering and held off for a few months before going to market. In retrospect, our timing was right on."
AT&T also considered the value of the building to the community and saw it had a better use as a residential building than offices, he said.
Many in the commercial office sector considered the building at 140 New Montgomery St. a white elephant because of its tiny floor plates of just 13,000 square feet. The building no longer works as a modern office highrise.
At the deal's outset, Wilson Meany considered converting the building to a hotel with condos on top but has since decided to do high-priced condos over an upscale ground floor restaurant. Prices for high-end condo projects in SoMa have been escalating and Wilson Meany was comfortable with doing a condo conversion.