Once seen as stable assets in a balanced investment portfolio, commercial real estate securities are now largely avoided by banks in San Francisco—with traditional lenders citing excessive risk and higher short-term interest rates as reasons for declining loans, according to experts.
“There’s no money out there,” Nick Slonek, global real estate firm Avison Young’s principal and regional managing director for the San Francisco area, told The Epoch Times. “The best money available is above 9 percent interest and with 50 percent down, and that’s only for a bulletproof deal.”
Left with few options, more borrowers are now turning to privately offered loans at higher rates and with significant origination fees—with examples of such at 12 percent interest rates and fees due on signing of 5 percent, industry analysts report.
In 2019, when financing was more readily available, loans were available in the 2.5 percent range with 10 to 20 percent down, but a combination of high vacancy rates and plummeting values of commercial real estate have added to lenders’ wariness, according to experts.
“Everybody who’s basically bought buildings in 2015 to present ... the buildings are now worth the same or less than they paid,” Mr. Slonek said. “And up to 50 percent of those buildings are worth less than the loan amounts.”
Seeking to avoid risk, banks have reduced exposure to commercial real estate securities by nearly 50 percent over the past year, according to Federal Reserve data—although the drop in loan origination isn’t spread evenly across the industry. Statistics show regional banks retaining similar holdings while larger national banks have reduced lending.
“It’s difficult to get financing for office and high-rise residential in downtown San Francisco,” Joseph J. Ori, executive managing director of Paramount Capital Corporation—a real estate investment and advisory firm based in the Bay Area—told The Epoch Times Nov. 29. “It’s not impossible to get financing if the property is fully leased and the borrower has solid investment credentials.”
While vacancy rates once hovered in the single digits, those of 35 to 40 percent are now reported by industry experts. Fully leased buildings are the exception in the city, as businesses and residents have fled in record numbers since 2020.
Some commercial real estate borrowers and experts are pointing to high levels of violence and theft as contributing to the problem, with drug use and criminal activity increasingly affecting public safety in recent years.
“There has been a mass exodus of residents and businesses out of the city during the last couple of years, due to high crime, rampant homelessness, no bail laws, and minimal criminal prosecutions,” Mr. Ori said. “Many of the store and business closures are the result of employees not wanting to live in or travel to the city to work because of the crime safety issues.”
The loss of businesses in the financial district and Union Square—once the most desirable areas in the city—are exacerbating the demise with drugs fueling the problem, according to Mark Sackett, a building and business owner located in the SOMA—south of Market—area of San Francisco.
“Every other building is boarded up. It’s all over the city right now, and it looks like a third-world country,” Mr. Sackett said. “You now have people sleeping and high and smoking fentanyl in front of all these doors.”
Faced with unpleasantries on the street and a fragile financing market, he told The Epoch Times that he needs to refinance the mortgage of his building by February and that after being rejected by more than 30 banks, he’s looking for alternative solutions.
“Most of those lenders said we’re not going to make a commercial loan in San Francisco right now,” Mr. Sackett said. “By now, I’m less than 45 days away from losing my building because I can’t find a loan.”
The building was appraised at $8.5 million in 2019 and now is reportedly worth approximately $5 million. So if forced to sell, he said, he risks losing his life’s savings.
“This is my life, and every penny of my life is in this building,” Mr. Sackett said. “And now I’m not only losing the building but losing everything I’ve worked for for 30 years.”
As the owner of a storefront offering antique print materials and an event business called The Box SF, he said the loss of his and other businesses in similar situations will affect the city and its tax base.
“We employ up to 200 other people throughout the year: florists, DJs, caterers, furniture rental companies. ... We represent a pretty significant food chain here,” Mr. Sackett said.
While San Francisco’s commercial real estate woes are more widespread than other cities in California, changes in office spaces due to work-from-home policies that expanded during the COVID-19 pandemic have altered the industry across the state and beyond—with lending tightening across the nation, based on Federal Reserve statistics.
With short-term interest rates rising, investors are eyeing options such as treasury bonds and other securities that some find more attractive and less risky than commercial real estate investments, according to experts.
“That’s pushed risk-free investments higher, which has stymied property transaction activity,” analytics firm Trepp noted in its third-quarter 2023 data report. “The uncertainty in real estate markets and other economic and banking concerns, meanwhile, has pushed many lenders to the sidelines.”
Trepp’s report revealed the fewest commercial mortgage-backed securities issued since 2011 and the smallest quarterly rise since 2014, less than 1 percent in the entire commercial property debt market.
Further complicating the market are an estimated $2.8 trillion worth of commercial loans set to mature by 2027, according to the report.
“As a result, many of the properties whose loans are coming due could find themselves overleveraged and in need of additional equity or rescue capital,” Trepp’s analysts wrote in the report.