‘House of cards waiting to collapse’: This major hotel company just wrote off San Francisco, stops payments on 4-star properties due to 'major challenges' — will others follow suit?
Hotelier Park Hotels & Resorts Inc. (NYSE:PK) is handing in the keys for two of San Francisco’s most prominent hotels due to “major challenges” in the city.
As of June, Park — one of the largest publicly-traded lodging real estate investment trusts (REITs) — is no longer making payments towards a $725 million loan tied to the Hilton San Francisco Union Square and the Parc 55 San Francisco.
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Between them, the huge hotels — located just a few blocks from the city’s once-buzzing Moscone Center conference hall — boast 2,945 rooms and are estimated to be worth a combined total of $1.56 billion.
Park’s ultimate aim is to remove the two hotels from its portfolio and “reduce the negative overhang” from the coastal California city, which has struggled to regain its footing after the COVID-19 pandemic.
“Now more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges,” said Thomas J. Baltimore, Jr., chairman and CEO of Park, in an announcement on June 5.
What are the big issues plaguing San Francisco — and what could it mean for real estate investors?
‘Major challenges’ in the Bay Area
San Francisco was once considered a “prime market” by hoteliers. Park’s portfolio includes 46 premium-branded hotels and resorts with more than 29,000 rooms across the U.S. — and its website specifically cites locations in the Bay Area, along with Boston, Miami and Los Angeles.
But now the REIT has ceased payments on its non-recourse CMBS (commercial mortgage-backed securities) loan, which is due to mature in November 2023, and it’s working “in good faith with the loan’s servicers to determine the most effective path forward.”
Baltimore described the decision to stop debt service payments as “very difficult, but necessary” — and “in the best interest for Park’s stockholders.”
He said the challenges San Francisco is facing are “both old and new.” For instance, the city has struggled with “record high office vacancy” due to remote work trends triggered by the pandemic.
Baltimore also raised “concerns over street conditions” — possibly alluding to the wave of crime (notably, theft and drug issues) that has already led to an exodus of major retailers from the city center.
Finally, he cited “weaker than expected” numbers of citywide convention events booked through 2027, which is anticipated to hurt local businesses and reduce demand “for the foreseeable future.”
Ultimately, Park’s CEO said the burden on the trust’s operating results was too high and “removing the loan and the hotels will substantially improve our balance sheet and operating metrics.”
If Park held onto the two hotels, it would likely have had to refinance its loan at a higher rate in the fall. This is because the Fed’s efforts to control inflation by hiking interest rates have made it more expensive for borrowers to finance or refinance commercial real estate — a trend that has also resulted in a precipitous drop in demand for properties.
A Reddit user alluded to the interest rate pain on a subreddit about Park’s exit, saying San Francisco “seemed like [a] house of cards waiting [to] collapse the second interest rates were at a non-zero level, especially after the lessons learned in 2008.”
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What does this mean for real estate investors?
San Francisco’s commercial real estate troubles are representative of a bigger picture. There are similar — but perhaps less acute — problems happening in major metropolitan hubs across the country, causing headaches for commercial real estate investors.
For instance, the rise in remote and hybrid work during and after the COVID-19 pandemic led to less demand for office space in New York City, causing the value of all New York office properties to drop by $28.6 billion in 2022, according to a report by New York’s Office of the State Comptroller.
What it boils down to is a sector that’s deep in the red for various reasons — with a $1.5 trillion wall of mortgage debt that comes due for repayment before the end of 2025 — and not much obvious light on the horizon.
In recent months, investing experts — including Elon Musk — have sounded the alarm about a potential market crash.
Rich Dad Poor Dad author Robert Kiyosaki went so far as to declare the U.S. is facing the “greatest real estate crash ever,” in a tweet on June 7.
“2008 was the GFC [global financial crisis]. 2023 will make 2008 GFC look like nothing,” the investment guru wrote. “In 2019, office towers in San Francisco were hot. In 2023, [the] same buildings have lost 70% of value.”
Likewise, real estate investing expert Patrick Carroll said the commercial real estate market is tumbling toward a crash that could be as devastating as the 2008 crisis.
“The party’s over, unfortunately,” he said. “The office market’s going to be destroyed, hotels are going to be destroyed — it’s going to be ugly.”
The only (relatively) safe bet in the sector, according to Carroll, is residential real estate, which has managed to maintain its strong fundamentals through the economic turmoil of recent years.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
