San Francisco’s downtown area is facing further disinvestment as the owner of two prominent hotels, Hilton San Francisco Union Square and Parc 55, has announced its decision to cease mortgage payments and relinquish the properties.
Park Hotels & Resorts (NYSE: PK), the owner, announced on Monday that it had stopped making payments on a $725 million loan scheduled to mature in November this year, expressing its expectation of ultimately removing these hotels from its portfolio.
With 1,921 rooms, Hilton San Francisco Union Square holds the distinction of being the city’s largest hotel, while Parc 55, with 1,024 rooms, ranks fourth in terms of size. The two hotels comprise approximately 9% of San Francisco’s hotel inventory.
Park Hotels CEO, Thomas Baltimore Jr., stated that reducing their current exposure to the San Francisco market is in the best interest of the company’s stockholders. He highlighted the challenges that the city faces, including a record-high office vacancy rate of about 30%, concerns regarding street conditions, a slower return to office compared to other cities, and a weaker convention calendar projected until 2027. Moreover, San Francisco’s convention-driven demand is expected to be 40% lower between 2023 and 2027 compared to pre-pandemic levels.
“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,” Baltimore said in a statement.
“Unfortunately, the continued burden on our operating results and balance sheet is too significant to warrant continuing to subsidize and own these assets.”
Based on the 2016 appraisal for the current loan, the two hotels together are worth $1.56 billion, more than twice the $725 million loan. The company’s willingness to abandon over 50% of the value indicates how serious the company is about its pessimism for the city’s foreseeable future. It could also be a symptom of a problem with how the city’s buildings are appraised, which investment advisor Mike “Mish” Shedlock addresses in his thread.
Similarly, a 22-story downtown San Francisco office building valued at around $300 million in 2019 was expected to go on sale for a meager $60 million in April — an over 80% drop in value in just four years.
Downtown Ghost Town
The city’s downtown area is not so slowly becoming a collection of empty buildings and storefronts.
In April, Whole Foods Market temporarily closed its less-than-a-year-old flagship store in the downtown area, citing staff safety as the reason. The store and its staff have reportedly been heavily affected by deteriorating street conditions due to drug use and an increasing crime rate. Prior to the decision to close the store, they had already cut operating hours due to the increasing rate of theft and hostile visitors.
In May, Nordstrom also announced that it will be closing its San Francisco stores by the end of August.
Information for this story was found via San Francisco Chronicle, Park Hotels & Resorts, Twitter, and the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
