Dive Brief:

• More than three years after COVID-19 lockdowns began, San Francisco continues to be a problem spot for apartment owners, according to a recent report from real estate data firm Trepp looking at the effect of crime on commercial real estate in the city. 
• San Francisco is home to 33.5% of the properties on Trepp’s watchlist, which is a surveillance tool for loan modification information, performance reports, delinquency and prepayment data. The apartment communities in the city have a delinquency rate of 7.6%, which is the highest in California.
• As workers stayed home after the pandemic hit, crime rose in San Francisco, which poses challenges for all properties, according to Trepp. Violent crime increased 8% in the city from 2020 to 2022, according to data from the San Francisco Police Department. 

Dive Insight:

The median rent in San Francisco sits at $2,207, roughly the same as August and down 4.3% over the past 12 months, according to Apartment List.  From January 2022 to August 2022, rents increased 6.2% while from January 2023 to August 2023, they increased 1.1%. 

San Francisco’s rent growth has fallen 2.4% behind the state average and 1.1% behind the national average. The issues in the city have manifested into financial problems for landlords, according to Trepp. These include:

• The nearly 3,200-unit Parkmerced apartment complex, which carries $1.5 billion in debt. The complex’s occupancy declined from 94% to 76% between 2019 and 2020. The debt service coverage ratio of the three loans backed by the asset fell to 0.39x in 2022.
• The five-asset Mosser Swig Portfolio, which has DSCR levels below 1.2x. “A significant majority of these properties are situated within a mile of the Tenderloin neighborhood, which is identified as the epicenter of crime-affected business areas,” according to Trepp.
• A $384 million loan backed by NEMA San Francisco, a 754-unit residential tower in San Francisco next to the headquarters of social media giant X (formerly known as Twitter), which recently was sent to special servicing, according to a separate report from Trepp. The property’s DSCR has been below 1.0x since 2020, and its net cash flow has come in below 1.0x since late July.
• A joint venture between San Francisco–based Veritas Investments and affiliates of Boston-based Baupost Group, which defaulted on a $448 million loan in December backing 1,734 rent-controlled units in 62 multifamily properties across San Francisco, according to Fitch Ratings.

Multiple causes

While many cities, like New York City, have come roaring back after the COVID-19 shutdowns in 2020, San Francisco has struggled to regain its footing. In particular, the shift to working from home has made proximity to workplaces less important. At the end of the second quarter of 2023, the San Francisco office market had an overall vacancy rate of 31.6% and a net absorption of negative 1.8 million square feet. 

But on the second quarter REIT earnings calls, there was commentary from executives expressing confidence that workers were returning to offices in the city. “In downtown San Francisco, we hear from our teams that new residents say that they are leasing to get closer to work,” said Michael Manelis, chief operating officer for Chicago-based REIT Equity Residential, on the REIT’s second-quarter earnings call. 

“A neighborhood characterized by high crime rates can lead to concerns for safety, which could dissuade businesses and their employees from choosing to occupy spaces in such areas,” according to Trepp.

However, Manelis expressed optimism that the crime situation is improving. “The good news is that the quality of life in downtown San Francisco continues to improve and the local government’s focus seems to be showing some signs of promise,” he said.

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