Crisis approaches as loans mature and tourism rebound lags.

JUN 9, 2023, 3:43 PM
By Pawan Naidu

San Francisco hotels are approaching a debt crisis as many properties struggle to meet their loan service payments and higher interest rates make refinancing too expensive.

According to a report by Trepp, 89 percent of lodging CMBS loans in the city have debt service coverage ratios of less than 1.25, meaning the hotels are barely making enough to cover their monthly loan payments. The largest of these loans were for Park Hotels and Resorts’ two-asset portfolio of Hilton Union Square and Parc 55. The company announced this week that it will cease making payments this month and the $725 million loan will be delinquent in July. The loan is set to mature in November and has an interest rate of 4.11 percent, according to data collected by Morningstar.

Other large loans that are set to mature soon are for the Hilton Financial District hotel with a current balance of $87.5 million and The Four Points by Sheraton with a balance of $11 million. They respectively have interest rates of 5.28  and 4.14 percent, and mature in November and October of next year. 

“You have an interest rate environment now that is significantly higher than when these were taken out,” David Putro, head of commercial real estate analytics at Morningstar, said. “If you have a loan that originated in 2013 and matures in 2023, you’re probably looking at a couple hundred basis points difference in interest rates.”

San Francisco has been near the bottom of the list when it comes to tourism recovery from the pandemic, and the rebound could stretch out longer with fears of a recession on the horizon.

“When you got to early 2020, every hotel in the country was basically on even ground — they were all zero cash flow and nobody could travel,” Putro said. “As we started to come out of the pandemic, especially as we’re seeing 2022 numbers come in, we’re seeing a tremendous jump in most markets. In San Francisco, it never rebounded to where it was in 2019 and it’s not projected to ever get back to that level again.”

While these trends imply continued distress in the market, the lack of space to build in San Francisco might entice borrowers to hold onto their assets. 

“People are looking at San Francisco and thinking it’s very difficult to build here and if we can hold onto our assets, we might be OK,” Alan Reay, president of consultancy Atlas Hospitality Group, said.