Big Mountain View office building at choice site faces loan default

A prominent and empty office building in Mountain View has tumbled into a default on its loan.

MOUNTAIN VIEW — A prominent and empty office building in Mountain View has tumbled into a default on its loan, fresh evidence that financial woes have widened for the Bay Area’s wobbly commercial real estate market.

The office building that’s in default is located at 590 East Middlefield Road at the corner of Logue Avenue, according to documents filed on Sept. 21 with the Santa Clara County Recorder’s Office.

The structure totals 99,600 square feet and is deemed to be a Class A office building, a marketing brochure states. The office building is empty at present.

The property owner group that defaulted on the loan is SHP Middlefield, an LLC that’s affiliated with Sand Hill Property Co., one of the Bay Area’s most successful and active developers.

“There are many nice buildings like ours sitting vacant,” said Peter Pau, principal executive and co-founder of Palo Alto-based Sand Hill Property Co.

Deutsche Bank AG New York Branch, the lender that filed the default, stated that the building owners have fallen behind in their mortgage payments on a 2018 loan totaling $48.75 million, the county real estate records show.

The default is a grim reminder of the problems that have hounded the office market in the wake of government-mandated business shutdowns that were instituted to combat the spread of the coronavirus.

The shutdowns chased office workers away from their places of employment. In the wake of this dislocation, employees have returned to the workplace in an uneven and halting fashion.

Even worse, tech companies during the second half of 2022 and the first three months of 2023 slashed jobs in the Bay Area at a rapid pace. The layoffs in turn prompted tech companies to scale back the amount of office space they need.

All of this has created sharply rising office vacancies and made it tough for property owners to find tenants for empty buildings.

This is the case with the 590 East Middlefield office building, according to Pau. The section of Mountain View where the building is located is struggling with weak demand for offices and increasing vacancies.

“This building has been vacant for 18 months,” Pau said in comments emailed to this news organization. “It is high quality. But now this whole area is dead. There is no tenant activity.”

Over the years since the original 2018 loan, the 590 East Middlefield financing was added to a bundle of CMBS real estate loans that were sold as a package to investors. Since the loan is now part of a big package, that made it tough for Sand Hill Property executives to work out a restructuring of the mortgage.

“We asked this lender for what I would call minor modifications, without impairing the loan, so we can continue to carry the property and wait out the slow market,” Pau said. “Almost any other lender would have said yes, given the reality of the market and our record as a good borrower.” Negotiations are underway, however.

Sand Hill Property has encountered great success in finding tenants for projects such as its tech campus in Palo Alto.

The veteran real estate firm also is the owner and prime mover of major development efforts at Cupertino’s long-closed Vallco Mall and southwest San Jose’s El Paseo de Saratoga complex.

In both instances, Sand Hill Property is eyeing the creation of game-changing mixed-use villages at the retail centers.

In the case of the Mountain View office building, SHP Middlefield, the Sand Hill Property affiliate, bought the building and its adjacent parking lot in 2018, paying $80 million for the property, county records show. Deutsche Bank provided the financing at the time of the purchase.

“Yes, there is a problem with this loan,” Pau said. “But this is just the beginning.” He added that talks are ongoing with the lender to see if the loan can be restructured.

The problems facing the 590 East Middlefield office building are hardly unique in the Bay Area.

Numerous office properties in the region and around the nation are facing a financing squeeze on their mortgages as the building owners grapple with rising vacancies and skyrocketing interest rates, which makes loan payments tougher.

“These days, values and loans are upside down,” Pau said.