The complex consisting of the Hilton San Francisco Union Square and Parc 55 hotels has seen its value drop by $1 billion, the San Francisco Business Times reported Monday, citing a note from real estate data firm Trepp.
Additionally, a Moody’s Ratings report obtained by Hotel Dive was not kind, downgrading the complex’s bond classes “as a result of the properties’ continued underperformance.” Originally class A, the bonds have since fallen five levels to Baa1.
It’s the latest hit for a market that’s already generated negative headlines in recent months. The bond class downgrades stem not only from the hotels’ underperformance, but also “continued weak fundamentals of the San Francisco downtown hotel market.”
The downgrades
Prior to the pandemic, the properties’ net cash flow had been “on an upward trajectory,” according to the Moody’s Ratings report. But between 2020 and 2022, the hotels were unable to generate net cash flow sufficient to cover their operating expenses.
While the hotels posted a “marginal” positive NCF in 2023, the boost was accompanied by a significant increase in operating expenses, Moody’s Ratings noted. Also in 2023, the complex’s owner, Park Hotels & Resorts, ceased loan payments on the two hotels, claiming “that it was in the best interest of their stockholders to exit the San Francisco market,” per Moody’s.
Out of the 65 major metro markets CBRE covers in its quarterly Hotel Horizons reports, “San Francisco is dead last in terms of recovery from the COVID-19 pandemic,” Justin Schlageter, first vice president at CBRE Hotels Advisory, told Hotel Dive.
Much of the trouble, Schlageter said, is due to San Francisco “putting all their eggs in the Tech Office sector.” Now that many tech workers and attendant office staff are working remotely, buildings in the city’s downtown are largely empty.
There has also been an increase in crime in the city, according to Schlageter, which has “aided the decline in the hotel market by dissuading corporate, group and leisure travelers [from visiting the area].”
Other market activity
As such, Hilton San Francisco Union Square and Parc 55 aren’t the only hotels struggling.
Earlier this month, Chicago-based Oxford Capital Group also defaulted on loans for four hotels in San Francisco — SoMa House, Hotel Fiona, Hotel Garrett and Hotel Julian — according to a Lodging Development report obtained by Hotel Dive.
Oxford Capital Group did not respond to Hotel Dive’s request for comment. The hotels are now owned by the loans’ lender, Acore Capital LP.
Elsewhere in the Bay Area, Park Hotels in June decided to shutter Hilton Oakland Airport. Of the 65 major metro markets CBRE tracks, Oakland, California, is second to last for post-pandemic recovery, Schlageter added.
“With an increase in labor costs, inflationary pressure on all costs and low occupancy levels over the recent past, many hotel owners cannot afford the debt service and so these properties are going back to the lenders,” Schlageter said.
In a fourth-quarter earnings call held earlier this year, Park Hotels CEO Tom Baltimore said that ceasing loan payments on the two downtown hotels “was a very wise and very prudent decision” given “how San Francisco has played out.”
Hotel purchase activity in California dropped 56.3% in 2023, according to San Jose’s The Mercury News. In Northern California, specifically, hotel acquisitions fell 48.3% when measured by dollar amount.
Schlageter said San Francisco “still has another two to three years before reaching a stabilized occupancy level for hotels.”
