San Francisco's doom loop accelerates

The owner of two major San Francisco hotels, including the city's largest hostelry, has announced that it is walking away from its mortgage on the two properties, surrendering them to the lender.

Park Hotels & Resorts Inc. ("Park" or the "Company") (NYSE:PK) today announced that, starting in June, it ceased making payments toward the $725 million non-recourse CMBS loan which is scheduled to mature in November 2023, and is secured by two of its San Francisco hotels—the 1,921-room Hilton San Francisco Union Square and the 1,024-room Parc 55 San Francisco. The Company intends to work in good faith with the loan's servicers to determine the most effective path forward, which is expected to result in ultimate removal of these hotels from its portfolio.

"This past week we made the very difficult, but necessary decision to stop debt service payments on our San Francisco CMBS loan," commented Thomas J. Baltimore, Jr., Chairman and Chief Executive Officer of Park. "After much thought and consideration, we believe it is in the best interest for Park's stockholders to materially reduce our current exposure to the San Francisco market. Now more than ever, we believe San Francisco's path to recovery remains clouded and elongated by major challenges – both old and new: record high office vacancy; concerns over street conditions; lower return to office than peer cities; and a weaker than expected citywide convention calendar through 2027 that will negatively impact business and leisure demand and will likely significantly reduce compression in the city for the foreseeable future. Unfortunately, the continued burden on our operating results and balance sheet is too significant to warrant continuing to subsidize and own these assets.

S.F. Hilton and Tower.

"Concerns over street conditions" is a delicate way of describing the takeover of much of downtown S.F. by drug addicts, currently termed "the unhoused," as if the main problem were high rents, when in fact the thousands of vagrants ruining the city are attracted from all over the country by the tolerance and active financial and social services support they receive.  They leave feces and urine on the streets, shooting up in front of the dwindling crowds of passers-by who have learned to avoid what was not very long ago one of the most attractive and vibrant cities in the world.

The high office vacancy rates, the lower return of workers to offices, and the reduced convention schedule that trouble Park's management are all closely related to the takeover of downtown (and other neighborhoods) by bums and junkies.

Jay Barmann of SFist points out:

The two hotels, as appraised in 2016 for the current loan, were worth a combined $1.56 billion. So it's a significant move that Park Hotels would walk away from debt that is less than half that amount — and as one analyst tells the Business Times, "it says that they are not optimistic that the business travel or convention and meetings business is going to return soon to downtown San Francisco."

The property taxes paid by the new owners will be based on the sales price they come up with.  Most likely, it will be half or less of the revenue currently received by the City and County of San Francisco (San Francisco is unique in California in being both a city and a county).  And comparable properties, as well as office properties, are all going to be seeking much, much lower taxes as the value of downtown real estate continues to plummet.  A fiscal crisis for the city is obviously ahead. 

The most optimistic scenario is that a new hotel operator or operators will purchase the two hotels at a fire sale price and attempt to keep them open as 4- or 5-star hotels for what remains of the tourist and business trade, with significantly lower room rates attracting bargain-minded clientele.  Of course, this would harm their also-struggling competitors, pulling customers away and depressing their revenue by forcing them to lower their rates.  There might well be more mortgages foreclosed and top-tier operators driven away as a result.  And that's the optimistic scenario.

The pessimistic scenario is that they, like so many hotels in Manhattan, become housing for illegal aliens and for the "unhoused" junkies, turning into instant slums.  This will only further depress the tourism, convention, and office business markets.

This is what is currently called a "doom loop."  It is hard to see it changing unless voters become fed up with the visible and highly unpleasant decline of their city and the cessation of city services and subsidies upon which they have become reliant, as the fiscal crisis hits home.  If that does happen, and a more normal civic response to the drug addict invasion — halting subsidies and services, passing and enforcing laws against drug use — becomes policy, then San Francisco can recover.  Its natural beauty, pleasant climate, and other innate advantages will once again attract mobile people with good financial prospects to live there.

Will this happen?  A friend, born and raised in the Bay Area who worked in downtown S.F. virtually his entire career, laments, "The problem with SF voters is that they are just TOLERANT of everything...including dystopia.  They are fine with it."

Photo credit: Eric in SFCC BY-SA 3.0 license.

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