San Francisco’s Commercial Property Sector Grapples with Rising Defaults.

Keyholders to the city’s prime real estate have started relinquishing ownership.


The stability of San Francisco’s commercial real estate market is on shaky grounds as lenders anticipate defaults on billions in debt. This comes after the owners of the city’s largest shopping center and principal hotel discontinued loan payments, returning the keys to their once prized assets.

A string of defaults in “The Golden City.”

Earlier this week, Westfield and Brookfield Properties revealed their halt in loan repayments on a $558 million loan, secured against San Francisco’s expansive downtown mall, which they’ve owned since 2002. They are now preparing to relinquish the property back to its lenders.

Just days before, Park Hotels & Resorts, listed in New York, expressed intentions to surrender ownership of two of its prime San Francisco hotels—the Hilton Union Square and Parc 55—after discontinuing payments on a $725 million loan. The hotels’ value surpassed $1.5 billion at the time of loan issuance in 2016, suggesting the owners now perceive their value as being slashed by more than half.

These sizeable defaults are the most recent distress signals from the city’s landlords of offices, hotels, residential buildings, and retailers. The city has been battling with a significant reduction in tourism and business travel due to the COVID-19 pandemic, tech firm downsizing, resident exodus, and global scrutiny over its crime, drug use, and homelessness issues.

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The path to profitability for SF commercial real estate is uncertain.

Thomas Baltimore, CEO of Park Hotels, expressed that San Francisco’s recovery path remains uncertain and hindered by major challenges, including “concerns over street conditions.”

As a result of these conditions, the city could witness a massive sell-off of commercial properties. Lenders, in an attempt to limit their exposure and shield bondholders, could rush to discard assets at hefty discounts. This price drop could create a ripple effect, making it difficult for property owners to refinance their debts as banks exercise further caution in lending.

We’ve reached a pivotal point where we’ve seen the economic headlines come true in the San Francisco market,” said Lonnie Hendry, head of commercial real estate at data provider Trepp, pointing out that the effects of this crisis have been more immediate in San Francisco than in other regions.

In the city’s financial district, some office towers have recently exchanged hands for a quarter of the price they were valued at three years ago. The uncertainty continues as the city’s economic situation remains volatile.

As lenders grapple with the fallout, significant players in the commercial real estate market, like Wells Fargo, which holds approximately $34 billion loans in California, and Bank of America, with nearly $14 billion of its total $73 billion outstanding commercial property loans in California, are exposed.

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Broader trouble in SF Bay Area Real Estate Markets

The negative trend in the property market doesn’t stop at city limits. In the wider Bay area, tech behemoths such as Google and Meta have offered vast sections of their office spaces for sublease.

San Francisco’s office market is anticipated to experience a high level of distress, with “refinancing challenges” looming over vacant offices. Office vacancies in the city have risen to 30%, the highest among major US cities. Hotels in San Francisco have also been hit hard, with room rates remaining below 2019 levels — a trend seen in just two major US cities.

Further defaults, such as those seen with the historic luxury Huntington Hotel and business hotel Club Quarters, could significantly affect city tax revenues. The decline could lead to a “doom loop” – a self-perpetuating downward economic and social spiral.

The possible decrease in San Francisco’s tax base due to reduced property value could compound the city’s projected $780 million budget deficit over the next two years. This could hinder the city’s ability to provide public services or offer businesses incentives to revitalize the downtown area.

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What’s next for San Francisco commercial real estate?

Proprietors of landmark San Francisco structures, including the Transamerica Pyramid and Uber’s Mission Bay base, are seeking tax reductions from the city due to the plummeting value of their properties.

Thomas LaSalvia from Moody’s expressed worry about San Francisco potentially losing its vital core. He alluded to a cascading impact, where the exodus of retailers and tech firms could further diminish pedestrian traffic, amplifying risks for the tenants and owners who stay behind. Consequently, this might heighten the likelihood of them failing to meet their financial obligations.

He added that when you lose the spark that attracts workers, shoppers, and tourists, it is not easy to bounce back to the same levels you once had.

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June 18, 2023