Park Hotels and Resorts, a Virginia-based real estate investment firm, said Monday that it had stopped paying back a $725 million loan on its main San Francisco properties and is likely to give two of the largest hotels in the city back to its lender.
The decision to offload the city’s largest hotel—the 1,921-room Hilton San Francisco Union Square—as well as its fourth-largest hotel—the nearby 1,024-room Parc 55 San Francisco—represents a major disinvestment and negative sign for what was once one of the strongest hospitality markets in the country. Taken together, the two properties make up around 9% of the city’s total stock of hotel rooms.
Park Hotels announced that it had stopped making payments on the loan, which has a November 2023 maturity date. In an earnings call earlier this month, Park Hotels CEO Thomas J. Baltimore Jr. said that the company expected to have the situation resolved by summer.
Alan Reay, president of hotel consulting firm Atlas Hospitality Group, said some hotels are facing headwinds similar to San Francisco's office market, which is seeing record-high vacancies.
“You tend to see issues, particularly in large, full-service hotels that have been focused on the business and commercial side of the business, like those focused on meetings and conventions,” Reay said.
He contrasted the situation with smaller leisure hotels in areas like Napa, Sonoma and Monterey counties that have reaped record revenues.
Reay said he’s concerned that the Park Hotels decision could be among the first in a line of dominos to fall in San Francisco’s hotel market.
He pointed to other signs of trouble, such as the distressed sale of the Huntington Hotel in Nob Hill and financial troubles at the nearby Stanford Court Hotel, which is having trouble paying back its loan.
In 2016, Hilton San Francisco Union Square and Parc 55 San Francisco were appraised at $1.6 billion, according to CMBS loan documents. Reay said the rubber could meet the road when a lender takes control of the properties and sells them off at a substantial discount.
“If you have a 50% reduction in value since 2016, if you start to take that across the board on other hotel assets, that’s going to be a major problem,” Reay said, noting that the properties most at risk are larger hotels that cater to business travelers.
In 2019, Hilton Union Square and Parc 55 earned $175.4 million and $95 million in room revenue, respectively. By 2022, those figures had fallen to less than $30 million for each, according to data provided by Reay.
Park Hotels has offloaded properties in San Francisco through the pandemic, selling off the 360-room Le Méridien in the Financial District for $221.5 million and the 171-room Hotel Adagio near Union Square for $82 million in 2021.
In a statement, Park Hotels said it plans to get the properties off its books in an effort to “materially reduce our current exposure” to the San Francisco market. Park Hotels also owns the 344-room JW Marriott Union Square and the 316-room Hyatt Centric Fisherman’s Wharf.
“This past week, we made the very difficult, but necessary decision to stop debt service payments on our San Francisco CMBS loan,” Baltimore said in a statement. “Now, more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges—both old and new.”
Among other reasons, Baltimore cited record high office vacancies, concerns over street conditions and a weak forecast for convention booking through 2027. The company estimates average annual convention room nights between 2023 and 2027 to come in at 530,000, a steep drop from the 875,000 annual room nights over the two decades prior to the pandemic.
Alex Bastian, President and CEO of the Hotel Council of San Francisco said that the Hilton Union Square and Parc 55 "are open for business and will stay open for business."
"It is not uncommon for hotel ownership to change. While the timing of this may appear less than ideal, we fully expect new ownership to come forth,” Bastian said.
Park Hotels projected that the removal of the San Francisco hotels from its portfolio will improve its balance sheet and financial performance metrics. In its investor presentation, the company said that returning the properties would lead to a forgiveness of debt income and a potential dividend payout of $150 to $175 million.
“To have a publicly traded company giving back the two of the largest hotels in the city, it's pretty scary for other hotel owners in San Francisco,” Reay said. “I hate to sound doom-and-gloom, but I think it’s going to get worse before it gets better.”