Big-money defaults add up for San Francisco properties in 2023

The Federal Reserve raised rates, and loans broke. 

San Francisco’s commercial real estate market, like many others, was pummeled by a wave of defaults this year, as owners struggled to pay off debt tied to offices, malls and hotels. 

Rising rates, lackluster return to the office and a slow return of business travel all led borrowers to default on a number of loans, prompting them to hand back the keys or succumb to foreclosure. Many of those loans were packaged into commercial mortgage-backed securities, meaning investors are on the hook for losses if interest payments stop coming. 

Others were fortunate enough to score extensions, kicking the can down the road in the hope that interest rates will dip in the future. 

The largest default of the year was on a loan for Veritas Investments, San Francisco’s largest residential landlord. The firm defaulted on nearly $1 billion in loans tied to 95 apartment complexes across the city. 

But defaults were tied to some of the largest real estate players in the city — Brookfield, Unibail Rodamco-Westfield, Park Hotels & Resorts and WeWork. 

Here are the largest loan defaults tied to San Francisco commercial properties in 2023, according to a TRD analysis and data from Morningstar Credit Analytics and Trepp. 

1. Veritas Investments | $941 million | 95 multifamily buildings 

In January, the news of Veritas’ default on debt for nearly $1 billion tied to 95 San Francisco apartment buildings kicked the new year off with a bang and led to a slew of stories following up on what would happen next for the city’s largest landlord. 

Veritas attempted to buy back its own debt on the larger of the two portfolios of apartment buildings, which together account for about a third of its San Francisco multifamily holdings.

Eventually, the properties were sold off in two deals. Ballast Investments and Brookfield bought $800 million in loans backed by 75 buildings with more than 2,100 units. Another $124 million in debt backed by 20 buildings plus a vacant lot went to Prado Group, which took ownership of the properties late last month.

2. Park Hotels & Resorts | $725 million | Hilton Union Square and Parc 55

In June, Park Hotels & Resorts said it would stop paying off a $725 million CMBS loan tied to 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 loan was set to mature in November, though Trepp had flagged the debt as far back as 2020 for being at risk of default. 

The CMBS bondholders sued Park Hotels & Resorts in October, asking the court to appoint a receiver. 

Unibail-Rodamco-Westfield | $558 million | Westfield San Francisco Centre

Over the summer, Unibail-Rodamco-Westfield and Brookfield Properties said the duo planned to stop making payments on the Westfield San Francisco Centre, the nine-story mall at 865 Market Street in Downtown San Francisco. Payments ceased after its largest tenant, Nordstrom, decided to exit the 1.45 million-square-foot mall in August. 

The firm defaulted on $558 million in debt tied to the property, which was packaged into CMBS deals. After the default, the CMBS bondholders filed a lawsuit to ask the court to place the property into a receivership, which would have the power to lease up and sell the property. 

Columbia Property Trust | $469 million | 650 and 201 California Street

When Pimco’s Columbia Property Trust defaulted on $1.7 billion in loans tied to office towers across the country, it was one of the largest office defaults since the start of the pandemic, and even since the 2008 financial crisis. 

About $469 million of that debt was tied to two office buildings in San Francisco — 650 California Street and 201 California Street, according to Morningstar data. 

After the default, the value of the seven-building portfolio was cut by about 30 percent, down to $1.6 billion, from $2.34 billion in 2022, Trepp data shows. The debt is still in special servicing. 

WeWork | $240 million | 600 California Street

Right down the road from Columbia Property Trust’s building lies WeWork Capital Advisors’ 600 California Street that landed in trouble in March. The co-working company defaulted on a $240 million loan tied to the 360,000-square-foot building, sending the loan to special servicing. 

WeWork’s default was partially WeWork’s fault, given the co-working firm “stopped paying rent in March of 2023, which led to the monetary default,” according to servicer commentary cited by Morningstar. 

In November, Trigild was appointed as a receiver on the property to help lease up the property and work with the lender. 

Emily Landes contributed to the reporting of this story.