A decision by Twitter to refuse to pay rent at its San Francisco headquarters may be putting additional stress on its landlord, Shorenstein, which is already struggling to refinance a $400 million loan on the property.
Capping off a chaotic three months under Elon Musk’s ownership, according a New York Times report, Twitter has not paid rent for its San Francisco headquarters or any of its global offices for weeks.
The report said the company is also refusing to pay for nearly $200,000 in charter flights, withholding payments to vendors and considering denying severance payments to laid-off employees.
Twitter currently leases around 820,000 square feet at its Market Street headquarters in deals that expire in 2026 and 2028. The company has sought to downsize its office space even as Musk has ended remote work for his “Twitter 2.0” era, which has been marked by mass layoffs, lost advertising revenue and, more recently, a city investigation of whether he illegally converted office space to living quarters.
Musk’s reported nonpayment of rent adds another layer of complexity for the building’s owners: Shorenstein, a real estate power player, and J.P. Morgan.
Shorenstein took over the former furniture showroom at 1355 Market St. in 2011 and redeveloped it into the Market Square campus, the centerpiece of a Mid-Market revival led by Twitter and other tech companies.
Shorenstein sold off a majority stake in the building through a recapitalization deal with J.P. Morgan in 2015. At that point, Shorenstein received a $400 million loan on the property with an interest rate just under 4%, according to loan documents from Trepp. Shorenstein’s refinancing issues were first reported by The Real Deal.
The loan matured on Sept. 9, and Shorenstein was unable to refinance its loan by that date. The company worked out an agreement with their lender, giving Shorenstein until early January to refinance and pay off remaining debt.
But the world is much different than it was seven years ago: Federal interest rates have spiked from near-zero levels, and widespread remote work has threatened commercial real estate values, nowhere moreso than in San Francisco.
Rising federal interest rates have made it more difficult for borrowers to refinance their loans, with lenders seeking higher rates of return. Add to that recipe a mercurial tenant—who has already started to withhold rent—and the math gets even trickier.
Shorenstein did not respond to a request for comment.
Given the current market, refinancing a loan like Shorenstein’s would likely mean a 6% to 6.5% interest rate, according to real estate experts. While it’s possible that another short-term pause could be worked out, the most likely scenario is that the loan moves into a stage called “special servicing” where a longer-term modification can be negotiated.
Nationally, signs of distress in the commercial real estate market are beginning to emerge.
Research from financial services company Moody’s said maturity defaults—like in Shorenstein’s case—and eventual delinquencies are likely to increase in line with rising interest rates.
“The reason why it’s ominous to me is that office is becoming basically untouchable,” said Dan McNamara, the founder of Polpo Capital, which has taken a short position against the office commercial mortgage-backed securities market. “There’s this argument being made that recession could bring people back into the office, somewhat ignoring the fact that recession has never been good for commercial real estate.”
According to data from Cred-IQ, 14 major office loans in San Francisco have a maturity date over the next 12 months. This includes loans for The Exchange development at 1800 Owens St., an eight-story office building at 55 New Montgomery and 188 Spear St. in SoMa.
“As the economy enters a recession, employment weakness will strain revenue from all property types, with still-elevated work-from-home levels heightening offices' vulnerability,” the Moody report said.