A decade ago, the real estate firm owned by billionaire Ben Ashkenazy—perhaps best known for hiring Drake to perform at his daughter’s bat mitzvah—made a major move into San Francisco’s Union Square.
His company purchased 1 Stockton St., which previously housed San Francisco’s Apple Store, for $42 million. The $3,000 per square foot price set a then-record for properties in the city’s premier shopping district.
Now, 1 Stockton St. sits conspicuously vacant on a prominent corner after San Francisco’s flagship T-Mobile store closed last May. According to information from real estate data company Trepp, a $66 million loan tied to the building has gone delinquent.
Also in 2013, in partnership with General Growth Properties, Ashkenazy purchased One Union Square for $95.8 million. A $50 million loan connected to that building— which has housed luxury brands like Bulgari, Moncler and Lacoste, as well as a now-defunct WeWork location—is now in special servicing after the borrowers defaulted on the debt.
Ashkenazy Acquisition Corporation did not respond to a request for comment on the properties. But both are examples of a wave of distress cresting in San Francisco’s commercial real estate market. While the real estate market reset is firmly underway in San Francisco, billions of dollars worth of commercial debt are still coming due this year as building owners struggle to refinance loans that were taken out before the pandemic.
There is currently $3.5 billion in commercial mortgage-backed security debt in San Francisco that is coming due by the end of this year, according to Securities and Exchange Commission filings gathered by Bloomberg. Importantly, this is just a fraction of the larger commercial mortgage market, as much of the debt is directly held on bank balance sheets.
Unlike residential home loans, owners of commercial mortgages pay mostly only interest until near the end of the loan term, when a large payment, usually equal to the original loan amount, comes due.
Getting to ‘Acceptance’
While the looming mortgage debt fallout is not expected to be as bad for the overall economy as it was during the Great Recession, experts say the risk of these debts not being settled in time could lead to some developers getting wiped out, more forced sales of buildings and potentially billions in losses for investors.
“We’re definitely more in the acceptance phase of it now,” said Kurt Altvater, who heads West Coast commercial mortgage sales at CBRE real estate company. “Things are being informed by actual sales comps—which as painful as that is—is what is needed to move forward.”
The buildings that have been trading are being priced as mass reductions, some up to 50% of previous purchase prices. Some owners are willing to walk away entirely from their properties, handing the keys back to their lenders.
In other cases, like the recent change of ownership at 201 Spear St. and Brookfield’s takeover of some 2,100 residential units from Veritas, well-capitalized firms can purchase existing debt at a discount.
Distressed owners trying to hold onto their properties are in the midst of some tough conversations with their lenders. The biggest hitch this time around, though, is that office vacancies and interest rates are abnormally high, which means the appetite to continue operating those properties has significantly decreased.
Altvater, who spent years as a banker specializing in commercial real estate loans, also provides advisory services to financial institutions. When navigating these conversations, he said there are two main things to watch for.
“It’s going to center on the borrower’s cash flow and the debt service based on where the interest rates are,” Altvater said. Essentially, as long as the borrower’s property is generating enough money to cover the interest payments, then it will generally be an easier conversation.
However, if cash flow doesn’t cover those payments, that will require the lender or investor to cover the remainder out of pocket, in addition to reducing the outstanding loan amount, Altvater explained.
One recent positive example of a successful negotiation between a lender and a property owner was in the case of One Market Plaza.
The 1.6-million-square-foot office complex, considered a trophy property in a prime location by real estate brokers, received an extension on its $975 million loan set to mature next month.
Although the property was on real estate industry watchlists, it also had points in its favor, including a low vacancy rate and top-tier tenants like Google, Autodesk and Visa.
A Year of Restructuring
Once a borrower misses or stops making payments, their loan goes into default, which can be the start of a painful foreclosure process that would see the property handed back to the lender, who can then put it up for auction if they do not want to hold onto it.
A notable example is Brookfield Properties and Westfield America's decision to give up the San Francisco Centre mall. Shortly after, the courts appointed Trident Pacific Real Estate Group to manage the property after the lenders, Wilmington Trust and Wells Fargo, sued Westfield for violating loan terms.
More recently, the Kivelstadt Group, headed by the husband-and-wife pair behind Sonoma’s Kivelstadt Cellars, has reportedly missed more than three months of payments on a $19.6 million loan tied to a Downtown office building they own at 140 Second St., just south of Salesforce Tower.
The Kivelstadt Group purchased the then-fully leased building for $28.3 million in 2014. By the end of September 2023, the building’s occupancy reportedly dropped to 32%, the San Francisco Business Times reported.
Altvater said most commercial property owners usually reach a tipping point when the property’s net operating income does not cover the mortgage bill. He added that even though property owners generally have liability limited to a specific property, it can be a bad look for future credit decisions if they just skip out on agreed-upon deals.
San Francisco has the fourth-highest number of commercial loans—18—up for refinancing this year among major U.S. cities, according to Bloomberg data. Only Manhattan, Houston and Los Angeles have more. Nearby Sunnyvale, home to some of Silicon Valley’s biggest companies, ranks fifth, with an estimated 10 loans coming due.
“All of real estate has got a problem of refinancing risk,” said Ken Rosen, chairman of the Center for Real Estate and Urban Economics at the University of California Berkeley. “The business of 2024 will be one of restructuring.”