Commercial Real Estate (CRE). Keeping a list of the various struggles in CRE today. As they say, location location location. San Francisco has a problem right now but there are other locations as well.
This week, Westfield and Brookfield Properties announced they had stopped making payments on a $558mn loan secured against San Francisco’s sprawling downtown mall that they have owned since 2002, and would surrender the premises to its lenders.
Days earlier, New York-listed Park Hotels & Resorts said it expected to hand over ownership of two of its prime San Francisco hotels — the Hilton Union Square and Parc 55 — after it stopped making payments on a $725mn loan. The hotels were valued at more than $1.5bn when the loan was issued in 2016, suggesting that its owners believe their value has more than halved.
The defaults could trigger a fire sale of commercial property in the city, as lenders rush to offload assets at significant discounts to reduce their exposure and protect bondholders.
In San Francisco’s financial district, some office towers have changed hands in recent months for a quarter of the price they were marketed at three years ago. WeWork defaulted on a $240mn loan for its tower on 600 California Street in April. Elsewhere downtown, Elon Musk’s Twitter stopped paying its rent in November, forcing its landlord to default on a $400mn loan.
Data from Moody’s, the rating agency, showed that 50 per cent of CMBS office loans that mature in 2024 are at risk of delinquency.
It is clear the assets won’t be worth more than the debt balances even if they put in more cash so [landlords will] ask themselves, am I better off just handing the asset back to the lender?
Office vacancies have risen to 30 per cent in San Francisco, the highest of any big US city. Hotels in San Francisco have also been particularly hard hit. The city has an average daily room rate of $207, which is below 2019 levels — one of just two large US cities where rates have not increased.
Club Quarters, a business hotel owned by Blackstone Group, has been delinquent on a $274mn loan since 2020. The Huntington Hotel, a historic luxury hotel in Nob Hill, defaulted on a $56mn loan originated by Deutsche Bank last year and was then later sold at a foreclosure auction for about half the size of the loan.
More than 20 other San Francisco hotels have CMBS loans that mature in the next two years so the down cycle in San Francisco still has legs.