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San Francisco sees surge in office defaults, with more on the horizon

Property owners struggle with higher interest rates and record vacancy of 34%

SF Sees Surge in Office Defaults, With More Expected
Bridgeton’s Atit Jariwala and 995 Market Street in San Francisco, PBV VI's Adam Knowlton and 1045 Bryant Street in San Francisco with GEM Realty Capital's Michael Elrad and 222 Kearny Street in San Francisco (Loopnet, LinkedIn, DigestiveHealthFoundation.org)

More San Francisco office buildings have teetered into default.

A surge in mortgage defaults tied to office buildings across the city raises the risk that more properties will be turned over to their lenders, the San Francisco Chronicle reported.

In August, loans linked to towers at 222 Kearny Street, 995 Market Street and 1045 Bryant Street went into special servicing, indicating a lack of payment or imminent default, according to DBRS Morningstar.

San Francisco Centre, the city’s largest mall, and two of the city’s largest hotels, the Parc 55 and the Hilton San Francisco Union Square, have already been seized by lenders.

That could lead to weaker tax revenue, as distressed owners appeal to the city for lower property assessments, resulting in lower tax bills. San Francisco faces a looming budget deficit that could top $1 billion in the next few years. 

Lenders could also sell foreclosed buildings at steep discounts, lowering valuations.

A shift to remote work has led to a record office vacancy rate of 33.9 percent, or nearly 30 million square feet of empty offices listed for lease or sublease. Higher interest rates have made it tough for landlords to refinance buildings and ward off defaults.

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In August, Chicago-based GEM Realty Capital missed a payment on a $23.75 million loan for 222 Kearny Street in Downtown. The 148,000-square-foot building, partially leased to troubled co-working firm WeWork, is 27 percent vacant.

Last month, New York-based Bridgeton Holdings defaulted on a $45 million loan tied to a mostly vacant office building at 995 Market Street. The 91,000-square-foot building was also once a major WeWork hub.

Carlsbad-based PBV VI, responsible for a $12.5 million mortgage tied to 1045 Bryant Street, saw it sent to a special servicer, the Chronicle reported.  Adam Knowlton, an attorney with Guardian Commercial Real Estate, is listed as a manager or member in a state business filing.

In June, Swift Real Estate Partners defaulted on a $62.3 million loan tied to the 111-year-old Sharon Building at 55 New Montgomery Street, home to the House of Shields bar.

Some of San Francisco’s most valuable office towers face mortgage maturity deadlines in the coming months, though owners were bullish they could refinance their debt. 

The properties include the city’s fourth-tallest building at 555 California Street, partially owned by former President Donald Trump; One Market Plaza, home to Google and Visa; and the former Charles Schwab headquarters building at 211 Main Street, according to the Chronicle.

— Dana Bartholomew

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Bridgeton HoldingsGEM Realty CapitalPBV VISwift Real Estate PartnersDonald Trump