SF Mall Falls on Watchlists for $180M in Maturing Loans

Maturing loans worth $180 million on Brookfield’s Stonestown Galleria, which is currently in the planning stages of a $2 billion redevelopment, have fallen on CMBS servicer watchlists.

Two loans mature on Oct. 1 for the mall next door to San Francisco State University, according to commercial mortgage-backed securities servicer data. One is for $150 million and the other is for $30 million; both were funded by Morgan Stanley in 2013 at an interest rate of 4.39 percent.

Net cash flow for the mall in 2022 was 16.2 percent lower than the underwritten level and the servicer also reported that occupancy is 66 percent, rather than the 94.5 percent occupancy when the loan was issued 10 years ago.

“The performance metrics aren’t great,” David Putro, Morningstar Credit’s head of commercial real estate analytics, said via email.

Brookfield did not reply to a request for comment but watchlist commentary from July says the borrower “stated they plan to refinance and will not begin the process until early Q3 2023.”

A refinance in that time frame appears difficult, according to Trepp Senior Managing Director Manus Clancy, especially given the redevelopment plans.

“I think anything that involves repositioning a property makes refinancing even more challenging,” he said via email. “Banks have pulled back, capital availability is low right now, and while this might get over the finish line, it won’t be as easy as it would’ve been a few years ago.”

Putro said that the redevelopment plan could be seen as a positive because it means that Brookfield is committed to working out a financing solution and holding onto the property. The site also reports a recent uptick in activity.

“Foot traffic is above pre-pandemic levels and with Brookfield’s redevelopment plan, it seems they’d be incentivized to find a way to pay off or negotiate an extension on the existing loan,” he said.

That puts these loans in stark contrast to the recent default at the Westfield San Francisco Centre mall, also part owned by Brookfield, because co-owner Unibail-Rodamco-Westfield had already decided to exit the U.S. market by the end of 2023 and had begun selling off properties.

“Fears of them walking away from properties that are severely distressed have been out there for over a year,” Putro said.

The Westfield, which is a vertical, largely interior mall located downtown, isn’t a good comparison to the more suburban-feeling sprawl of Lakeshore-adjacent Stonestown on a leasing level either, according to Cameron Baird, senior vice president of retail sales and leasing at Avison Young.

“Ultimately, I think it’s a different type of mall,” he said, adding that he would have no hesitation about showing a retail client a space at Stonestown, even though there could be some short-term tumult brought on by the redevelopment.

But he might think twice about the Westfield property, he said, given downtown’s continued issues with crime, homelessness and the slow return of office workers.
“There is a light at the end of the tunnel [at Stonestown], whereas I think at Westfield there’s some uncertainty,” he said. “The problem is, people aren’t downtown.”