Can downtown SF overcome death by financial instrument?
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Long after SF lifted its COVID controls, Union Square Hilton and Parc 55 are still bedridden. Westfield has all but given up the ghost. Marc Joffe explores for NR how parasitic financial instruments—variants of those that triggered the Great Recession—have immunocompromised the city center while crime creeps in.
Downtown San Francisco, especially in the vicinity of its Union Square shopping hub, remains in the doldrums years after other cities recovered from Covid-era lockdowns. One factor delaying a downtown renaissance is that some key properties are encumbered by securitized mortgages, which are taking time to unwind. These deals, known as single asset single borrower commercial mortgage-backed securities (SASB CMBS), attracted attention earlier this year when the AAA-rated tranche of a New York City deal took a haircut. Shortly thereafter, the Financial Times, the Wall Street Journal, and Bloomberg reported on other AAA-rated SASB CMBS bonds that may face losses. As I discussed in a December 2020 Capital Matters column, these instruments are reminiscent of the failed Residential Mortgage-Backed Securities widely blamed for triggering the 2008 Global Financial Crisis.
San Francisco Centre, a large shopping mall across from the Powell Street cable car turnaround, is the most publicized of the distressed properties. The mall has been losing tenants since Covid-19 struck, with the biggest losses being those of a Nordstrom department store and a multiplex cinema. With those anchors gone, smaller stores have experienced less foot traffic and thus reduced sales, forcing them to close as well. The mall is now only about 30 percent occupied.
Westfield, the mall’s owner, stopped making loan payments in June 2023. San Francisco Centre then went into receivership. The receiver originally planned to auction the mall in November 2024, but this date has now slipped to December. The megamall has not had proactive management for over a year, and most players involved with the mall have little or no incentive to quickly resolve its insolvency. The special servicer of the CMBS deal, who represents bondholder interests when a CMBS loan gets into trouble, receives monthly fees, as does the receiver, and the interim property managers. Attorneys handling the foreclosure are typically paid based on the number of hours worked.
Within a short walk of the San Francisco Centre are a pair of large hotels facing foreclosure after defaulting on a mortgage backing another SASB CMBS deal, Hilton USA Trust 2016-SFP. The Hilton San Francisco Union Square and Parc 55 Hotel collectively comprise 2943 rooms, which are vacant most of the time. For the year ended September 30, the two hotels had an occupancy rate of just 45.5 percent despite offering relatively low average room rates. Adverse street conditions have deterred organizers from hosting conventions at the nearby Moscone Center, reducing the number of business travelers. The mortgage has been in default since June 2023, and the hotels are not expected to be sold until next year.
For the mall and hotel properties to return to viability, they will likely have to be reimagined. Outgoing mayor London Breed suggested converting San Francisco Centre into a soccer stadium, while a real estate expert recommended converting the hotels to apartments, given San Francisco’s well-publicized housing shortage. Such pivots will not happen unless and until these parcels are transferred to new owners with the resources and motivation to implement a turnaround plan.
Read the whole thing here.
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