The owner of the 24-story office tower at 600 B Street in downtown San Diego is on the brink of losing the building as the lender seeks to recoup more than $83 million in unpaid debt. The troubled property is the first — but likely not the last — significant casualty of a downtown office market crippled by pandemic-era lockdowns and the hybrid work models that emerged thereafter. Last week, First American Title Insurance Company, acting as trustee, initiated a foreclosure process that will likely see the property sold at auction later this year or returned to its lender, Western Alliance Bank, property records show. Building owner Rockwood Capital has been delinquent on loan payments for more than a year, the records show. “The storyline at 600 B Street is the same storyline for numerous office buildings in Los Angeles, San Francisco and other cities throughout the United States,” said Gordon Gerson, whose commercial real estate law firm, Gerson Law, represents financial institutions. “The buildings are not generating revenue through rents to service debt, and the equity in the property is so diminished that developers are just moving on and letting go of the properties.” Opened in 1974 and upgraded in 2007, the 359,278 square-foot tower at 600 B Street takes up an entire city block between Sixth and Seventh avenues downtown. San Francisco-based real estate investment firm Rockwood Capital — using the entity, 600 B Street San Diego LLC — purchased the 1.38-acre property for $109.5 million in August 2017. At the time, the company took out a short-term, $81.2 million loan with HSBC Bank to finance the transaction, property records show. In October 2021, Rockwood then refinanced its debt with Western Alliance Bank, taking out a $77 million, variable-rate loan from the bank, according to the building’s deed of trust. Rockwood has been in default on the loan since May 5, 2023, when the firm first failed to make its monthly payment, according to a notice of default and election to sell under deed of trust filed with the County Recorder’s Office. The notice of default was filed on June 28 by First American Title Insurance Company, which is the trustee and is assisting with the foreclosure. The filing, which lists the total amount owed as $83.8 million, formally starts the foreclosure process and gives the borrower 90 days to get back into good standing before a notice of sale is published. Rockwood Capital and Western Alliance Bank, through spokespeople, declined to comment for this story. “In this particular (real estate) cycle, the value of office buildings is so diminished that discussions are entertained between the borrower and the lender as to whether or not there is any opportunity for a workout,” Gerson said. “At the point in time the notice of default has been filed against an office property, in this cycle, it pretty much suggests that the lender and the borrower are at a point of no return.” What transpires once a notice of default is filed can vary from property to property, depending on the relationship between the borrower and the lender, said Mike Adams, a managing director with Stream Realty Partners, a national commercial real estate firm. “Sometimes it’s a little bit of a cat and mouse game depending on that relationship,” said Adams, who is based in Irvine. “No situation is really the same, but if the borrower is under water, where the loan is more than the building value, there’s no reason for the operator to stay in the deal because there’s no way to get their money back.” The foreclosure process, which usually takes 120 to 130 days, typically ends with an auction on the courthouse steps, Gerson said. The mostly likely scenario is that there will be no bidders — assuming that the opening bid is equal to the amount owed — and the property will go back to the bank, he said. The potential outcome would represent a dramatic flip in circumstances. When Rockwood purchased 600 B Street in 2017, the building was nearly 90 percent leased. At the time, WeWork, The San Diego Union-Tribune and Mitek Systems were the anchor tenants. The city of San Diego is also a smaller tenant in the building. Today, 225,000 square feet of space is available for lease at 600 B Street, said Tim Olson, a real estate broker who is the market lead for Jones Lang LaSalle in San Diego. The figure includes space that WeWork is marketing for sublease, he said. WeWork, which exited bankruptcy last month, has long been the building’s largest tenant. In 2016, the coworking company originally leased six floors and 88,273 square feet of space. With its recent reorganization, WeWork is retaining its lease at 600 B Street, but it remains unclear how much space it will keep. The Union-Tribune no longer occupies the high-rise. The newspaper originally leased four floors as part of a 15-year rental agreement, but last year gave back two of those floors to the owner, as permitted under the lease. Earlier this year, the Union-Tribune formally surrendered possession of the other two floors as part of an ongoing civil case. In 2023, the company was sued for back rent amounting to hundreds of thousands of dollars as part of an unlawful detainer action. The legal matter has since been converted to a civil action for breach of contract. A court hearing is scheduled for later this year. The tenancy challenges at 600 B Street are not unique — they extend up and down San Diego’s B Street corridor, where 13 office towers, offering a combined 4.3 million square of feet of space, are struggling to respond to workplace dynamics that have shifted considerably in recent years. Nearly 38 percent of office space in the corridor is available for lease, Olson, the JLL broker, said. “600 B Street is the first of what I feel is going to be a domino of failure along the B Street corridor,” said real estate analyst Gary London, a principal of local firm London Moeder Advisors. “In this post-COVID era, we’re seeing a permanent downsizing in office space demand, and there’s going to be winners and losers. The winners are going to be the newest, best located buildings with the most marketability. The losers are going to be yesterday’s winners. “The B Street corridor is filled with buildings that were mostly built in the latter half of the last century, and they’re no longer considered … the ‘it’ buildings anymore.” Last year, the overhauled and rebranded Twenty by Six property at 450 B St. and 451 A St., just two blocks west of 600 B Street, appeared to run into financial trouble. In December, then-owner LeBeau Realty & Associates transferred ownership of the two-building property for an undisclosed sum to real estate investment management firm Heitman, the deed in lieu of foreclosure shows. At the time of the transfer, LeBeau had $83.5 million in unpaid debt. Downtown, however, appears to an outlier in an otherwise healthy San Diego office market. “Most of our business and innovation sectors are all in the suburban markets,” Olson said. “The suburban markets are pretty insulated from anything that’s happening downtown.” San Diego’s overall office vacancy rate, just shy of 14 percent, is one of the lowest in the country, he said.