San Francisco's Rental Market Woes Continue as Top Landlord Sells Major Housing Portfolio

San Francisco faces a new real estate crisis as another major landlord offloads 459 units across 12 buildings, a stark indicator of the city's faltering residential market amid soaring crime rates and plummeting occupancy.

Downturn deepens: San Francisco's multifamily sector has joined the office market in a steep downturn. Property owners are reeling under the weight of high interest rates, sinking occupancy rates, and dwindling rental incomes, signaling a widespread crisis in the city's real estate landscape.

Another one: Mosser Companies' recent default on a 2018 loan for $88 million loan, backed by 459 rental units, exemplifies this trend. With an 85% concentration in the Civic Center neighborhood, the company's portfolio, once valued at $154 million (94% occupied), has depreciated significantly. The company's creditor has now hired real estate firm Cushman & Wakefield to sell the multifamily home properties, The San Francisco Chronicle reported.

Zoom out: This trend isn't isolated to Mosser Companies. Other major players like Veritas Investments have faced similar crises, indicative of a broader sectoral shift. The Mortgage Bankers Association estimates that $2.6T of real estate loans will come due nationally through 2028, with multifamily accounting for 38% ($988B). More than $1B in CMBS loans tied to multifamily in San Francisco will mature between 2024 and 2028. The combination of maturing debt and challenging conditions poses significant obstacles for multifamily landlords.

➥ THE TAKEAWAY

Boom, bust, recovery: San Francisco's real estate crisis is more than a financial predicament; it's a reflection of deeper social challenges. The city's struggle with crime, drug abuse, and homelessness is not just a backdrop but a driving force behind the changing real estate landscape. While the market is resetting, new groups are seizing distressed opportunities, leading to a changing of the guard.

Powell: CRE Problem Manageable Despite Small Bank Challenges

Federal Reserve Chair Jerome Powell foresees more small bank closures due to commercial real estate challenges but maintains the situation is “manageable,” contrasting to the 2008 financial crisis.

Crisis in motion: In a recent "60 Minutes" interview, Powell expressed concerns about regional banks, sparked by troubles at New York Community Bancorp's (NYCB) 70% dividend cut and quarterly loss, which has raised concerns about the vulnerability of regional banks.

Zoom in: These banks have a greater exposure to CRE, accounting for 44% of their total credit compared to 13% for larger banks with assets over $100B. Loans tied to offices and certain multifamily properties are very vulnerable.

Tightening the screws: U.S. banks witnessed weakened demand for CRE loans in Q4. Bank officers tightened lending standards, except for residential real estate loans. While this course may alleviate some risks, it could also limit credit access for businesses in need.

Managing the problem: Despite the challenges faced by smaller banks, experts suggest that the CRE problem should be manageable for the industry as a whole. Analysts note that other banks may handle their exposure to CRE better than New York Community Bancorp, which was under-reserved relative to the risk in its portfolio. The severity of the issue may depend on factors like inflation, interest rates, and the overall state of the US economy.

➥ THE TAKEAWAY

Fed’s future outlook: The CRE problem facing U.S. banking may present challenges, particularly for smaller banks with high exposures. To weather these challenges, banks need to assess their risk exposure, strengthen reserves, and formulate comprehensive plans to manage expected losses. Banks can seize temporary opportunities offered by the sector's recovery by taking proactive measures.

Given what's happening across the country, you’d think that office developers in Austin would be a bit more prudent. But it seems like they’re not paying attention. Since H219, more offices are being built in the city that are being absorbed, with nearly 20MSF up for grabs.