Terrifying Revelations: The Alarming Truth About San Francisco’s Commercial Property Stability!

Lenders in San Francisco’s beleaguered commercial real estate market are poised for delinquencies on billions of dollars in debt after the owners of the city’s largest shopping mall and largest hotel ceased loan payments and returned the keys to what a it was once the most valuable property in the city.

This week, Westfield and Brookfield Properties announced they have stopped making payments on a $558 million loan secured against the sprawling downtown San Francisco mall they’ve owned since 2002 and would turn the premises over to its lenders.

Days earlier, New York-listed Park Hotels & Resorts said it would divest ownership of two of its top San Francisco hotels – the Hilton Union Square and Parc 55 – after it stopped making payments on a $100,000 loan. $725 million. The hotels were valued at more than $1.5 billion when the loan was issued in 2016, suggesting its owners believe their value has more than halved.

The large delinquencies were the latest in a series of warning signs from office owners, hotels, condominiums and retailers across the San Francisco. The city has struggled with a steep decline in tourism and business travel after the coronavirus pandemic, downsizing by tech companies, an exodus of residents, and international scrutiny over crime, drug use, and homelessness.

Park Hotels Chief Executive Officer Thomas Baltimore said, “San Francisco’s path to recovery remains clouded and stretched by major challenges,” including “concerns about road conditions.”

Westfield Mall has remained half-empty after brands like Nordstrom left, in part due to “rampant criminal activity” and because downtown foot traffic hasn’t recovered since the pandemic. Westfield said its sales fell sharply between December 2019 and 2022, compared to an average increase in sales at its other U.S. malls.

The default settings could trigger a fire sale commercial property in the city, as lenders scramble to offload assets at significant discounts to reduce their exposure and protect bondholders. In many cases, large commercial real estate lenders in San Francisco, including JPMorgan, Deutsche Bank, Wells Fargo, and Bank of America, have syndicated real estate debt through commercial mortgage-backed securities. Bondholders could take a hit as the collapse in property prices has left some of the loans under water, meaning the asset is worth less than the loan’s value, according to economists.

That repricing could trigger a knock-on effect that makes it harder for homeowners to refinance their debts as banks become even more cautious about lending. Some US banks have reduced their exposure to the commercial real estate market following the recent turmoil in the regional banking sector, and the prospect of losses is particularly acute in San Francisco.

“We have reached a tipping point where we have seen a lot of the [broader economy] the headlines are materializing in the San Francisco market,” said Lonnie Hendry, head of commercial real estate at Trepp, a data provider. “The dominoes have fallen much faster in San Francisco than in other places.”

In San Francisco’s financial district, some high-rise office buildings have changed hands in recent months for a quarter of the sale price they did three years ago. In April, WeWork defaulted on a $240 million loan for its tower at 600 California Street. Elsewhere downtown, Elon Musk’s Twitter he stopped paying the rent in November, forcing his landlord to default on a $400 million loan.

As San Francisco’s economic situation remains uncertain, the repricing could go further. “Even though you can buy a building today for 50 cents off the loan balance, that doesn’t mean it’s a home purchase,” Hendry said. “We don’t know the floor yet.”

Wells Fargo has among the largest commercial real estate exposures in San Francisco, with about $34 billion in loans outstanding in California, according to the filings. The state made up the largest percentage of its total $155 billion in outstanding loans at the end of 2022 (the bank does not report figures by city). Nearly $14 billion of Bank of America’s total of $73 billion in outstanding commercial real estate loans are in California. At First Republic, which collapsed in May following a bank run and was acquired by JPMorgan, about $12 billion of its total $35 billion in commercial real estate loans went to the San Francisco Bay Area, according to filings. for 2022. Deutsche Bank originated the Westfield Mall loan in 2016, while the Park Hotels mortgage is managed by Wells Fargo and was originally underwritten by JPMorgan.

Data from Moody’s, the rating agency, showed that 50% of CMBS office loans maturing in 2024 are at risk of default.

“This is a situation where it’s really a loss of confidence, at least temporarily, of some assets in the market,” Moody’s senior economist Thomas LaSalvia said. “There’s going to be a hit across the board,” he said of the commercially owned lenders.

Just outside San Francisco in the greater Bay Area, tech giants including Google and Meta have sublet parts of their sprawling offices. An executive at a firm that provides defaulted CMBS loans said it had created an “uncomfortable position” for homeowners and lenders who have campus-backed loans. “If they’re not utilizing the space, it stands to reason that they’re not going to renew the lease and then you have a big problem getting on track but you can’t do anything until the lease expires,” the person said.

The city is facing a downturn in technology and a shift to remote working, leading to lower demand for office space.

A senior executive at a large global real estate lender said the San Francisco office market will experience greater strain than other parts of the commercial real estate market. He said there would be “refinancing challenges” as loans mature on vacant offices.

“It is clear that assets will not be worth more than debt balances even if they put more money this way [landlords will] they wonder, is it better to return the asset to the lender?

Office vacancy soared to 30% in San Francisco, the most of any major US city. San Francisco hotels were also particularly hard hit. The city has an average daily room rate of $207, which is lower than 2019 levels, one of only two major U.S. cities where rates have not increased. Hotel bookings in San Francisco have been subject to a decline as travelers from China and as security concerns have prompted corporate conventions to relocate.

Club Quarters, a business hotel owned by Blackstone Group, has defaulted on a $274 million loan since 2020. The Huntington Hotel, a historic luxury hotel in Nob Hill, has defaulted on a $56 million loan originated by Deutsche Bank last year and was later sold at a foreclosure auction for about half the loan amount.

More than 20 other San Francisco hotels have CMBS loans maturing over the next two years, according to real estate data provider CoStar; 15 of those are on their lender’s “watch list,” meaning they’ve missed repayments or are at risk of missing out on future payments.

The growing number of defaults across multiple real estate asset classes has raised concerns about a decline in city tax revenues that could fuel a “downturn,” an economic and social spiral that becomes impossible to reverse. Large office buildings trading at deeply discounted prices would quickly erode a crucial part of the city’s tax base. San Francisco has projected a $780 million budget shortfall over the next two years, which will affect its ability to deliver public services or offer business incentives to help revitalize downtown.

The owners of some of San Francisco’s iconic buildings like the Transamerica Pyramid and Uber’s Mission Bay headquarters have petitioned the city to reduce their tax burden as the value of their properties plummeted.

“The worry about San Francisco is losing its critical mass,” said Moody’s LaSalvia. He said there has been a “snowball effect” in which departing retailers and tech companies lead to an even greater reduction in foot traffic, increasing the risk to remaining tenants and landlords, who are then more likely to default.

“When you get below the point where that vibrancy that draws tourists, workers and shoppers is gone, it’s really hard to go back,” he said.