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San Francisco Property Defaults Tick Up From Pandemic Lows

Written by Kevin TruongPublished Sep. 30, 2022 • 7:00am
The Scarlet Huntington Hotel (right) seen on Monday, August 27, 2018 in San Francisco, Calif. | Lea Suzuki/The San Francisco Chronicle via Getty Images

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For decades, the 12-story historic Huntington Hotel stood proud on Nob Hill, offering breathtaking views of San Francisco while playing host to numerous luminaries. But recent visitors to the building and the hotel’s website have been greeted with a brief message that the hotel, its spa, and the storied Big 4 restaurant would be closed “until further notice.”

That’s due, in part, to the property’s mortgage lender Deutsche Bank Ag threatening foreclosure against the hotel’s owner—a possible sign of things to come as defaults tick up from pandemic lows. 

In 2022 so far, the city’s Assessor-Recorder counts 307 default notices, compared to 214 in 2020 and 184 in 2021. A default notice is one of the first steps a mortgage lender takes as part of the foreclosure process, which serves to inform the property owner that they intend to seize the property unless they are paid the balance they are owed.

Jason Estavillo, managing partner of real estate-focused Estavillo Law Group law firm, said that the relatively low number of defaults during the pandemic was due to moratorium policies and the closures of courts and offices involved in pursuing foreclosures. 

Now, as some of those policies expire and with courts back open, Estavillo says he’s seen an uptick in calls from property owners who are being threatened with foreclosure. 

For commercial properties, Estavillo said that foreclosures will take time to play out as lease terms expire without renewal, leaving property owners unable to fill space or fulfill their mortgage obligations. A swath of commercial leases signed during the peak of the city’s economic boom are poised to expire over the next few years. 

The current default notice numbers are still a fraction of the sky-high numbers seen during the Great Recession, which brought drastically elevated foreclosures due to the securitization of mortgage debt and other risky financial schemes. In 2009, a high of 2,836 notices of default were filed with the city. 

While the majority of this year’s default notices are directed at individual homeowners who have fallen behind on their mortgage payments, a handful are for commercial properties—in particular, the hotels that have struggled with a lack of guests and office towers with high vacancy rates. Those trends could spell trouble for building owners looking to refinance, added Estavillo. 

“My thinking is that we’re heading towards another recession, interest rates are going up and people can’t refinance their properties,” Estavillo said. “It’s not the same as what happened in 2007 to 2010, but I just kind of see the writing on the wall.”

Case in point: Vijay Investments, the owner of The Civic Center Inn at 790 Ellis St. was threatened with foreclosure by mortgage lender Bank of the Orient, who says the organization owes $5.24 million on a $6 million loan.   

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The Yotel San Francisco, which opened as the brand’s first West Coast location in 2019, was also served a notice of default in April from their mortgage lender Starwood Property, who said the hotel owner owed $707,000 on a $64.5 million loan. 

Other buildings that are being threatened with foreclosure include 88 First Street and 508 Mission Street, which sit catty-corner to Salesforce Tower and were acquired by Chinese developer Oceanwide Holdings Group in 2017 as part of their now-stalled Oceanwide Center megaproject. The notice of default says that the company owes $1.16 million on a $16.3 million loan. 

Ted Egan, the city’s chief economist, attributed the current uptick largely to the domino effect of higher interest rates. 

“I would say some of it is maybe a recognition about work from home having something to do with the value of commercial property, but I think the more likely reason driving it now is just higher interest rates,” Egan said.

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Kevin Truong can be reached at [email protected]


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