6/9/2023: SF Hotel Owner Stopped Paying Mortgage
They are walking away from two hotels with 2900 rooms
Park Hotels & Resort, the owner of 1912-room Hilton San Francisco Union Square and 1024-room Parc 55 , has decided to stop paying mortgage on the $725 million loan due in November and plans to give the two properties back to the lender.
The two hotels were valued at a combined $1.56 billion in the appraisal at the time of the loan underwriting in 2016, according to a CMBS industry report on the loan for bond investors. But the loan balance is only $725M so the hotel owner is telling us that the property value has dropped more than 50% since 2016!!! The interest rate on the current loan is 4.11%. Given the new rate environment, should the loan be refinanced in November, the interest rate is likely to be a lot higher.
These two hotels represent 9% of the hotel stock in SF so it’s quite significant. It’s going to create a ripple effect for 30+ SF hotels which need to be refinanced in the next 2 years. Their appraisal value is going to be marked down significantly and it’s likely they also decide that handing over their keys to the lenders will be the best option.Otherwise, they will need to get a much smaller loan with a much higher interest rate.
In the press release, the Park Hotels & Resort CEO gave more colors on the decision:
This past week we made the very difficult, but necessary decision to stop debt service payments on our San Francisco CMBS loan. 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.
Well, I don’t think we can blame the company for walking away. But high office vacancy and concerns over street conditions are common concerns for many American progressive cities. The progressives need to get their act together to solve the crime and drug problems, which exacerbate the office vacancy issue. With the end of ZIRP/QE and remote work, this commercial real estate bust is going to be brutal and it’s just getting started. It’s going to get a lot worse from here.
Wow!