👋 First time reading? Sign up here.

SF Mega-Landlord Veritas in Default on $1B Loans, Could Lose a Third of Its Buildings

San Francisco's largest residential landlord, Veritas Investments, is reportedly seeking to sell off $1 billion in delinquent loans, potentially putting around a third of its properties at risk. However, for one opportunistic buyer, this could be the investment deal of the decade.

Non-performing loans: Veritas Investments is trying to sell two distinct portfolios of properties—one portfolio consists of 75 buildings and 45 commercial spaces and 2,149 units, while the other comprises 20 buildings with 303 rent-controlled units—that add up to a whopping $1B in delinquent loans.

Problem after problem: The latest report comes after Veritas failed to pay a $448M loan back in January, which already meant it could lose up to a third of its inventory in the city if it failed to resolve its debt. Moreover, organized tenant groups criticize the company for alleged unlawful evictions and subpar management. The Veritas Tenants Association, a union with 600+ members in over 30 Veritas-owned buildings, note unattended code violations, particularly in foreclosing properties.

Market uncertainty: Veritas Investments faces a distressed sale of properties amid a declining San Francisco real estate market. Challenges include the pandemic, retail decline, homelessness, and the fentanyl epidemic. Uncertainties in the market and assessing portfolio value may deter buyers, while high interest rates complicate matters. The uneven recovery across neighborhoods underscores the struggle to attract renters and stabilize the market.

➥ THE TAKEAWAY

Big picture: San Francisco's largest and most controversial landlord faces significant challenges in the months ahead. With $1 billion in delinquent loans at stake, their ambitious strategy of purchasing rent-controlled buildings, renovating them, and shifting the expenses to tenants isn't turning out to be the lucrative venture they envisioned.

⏩ Share this article by clicking here.

🌐 Around the Web

📖 Read about why no employees like “hot-desking”—or grabbing whichever desks are free—when they come into the office, and find out what companies should do about it.

🖥️ Watch as RXR Realty CEO Scott Rechler shares his insights on the state of commercial real estate and the potential challenges that regional banks may face in the future due to existing commercial real estate loans.

🎧 Listen to the latest episode of TreppWire, where they explore concerns over the debt ceiling and credit tightening on regional banks, as well as some promising fresh inflation data.

📝 Download JLL’s latest report on the evolution of global luxury hospitality assets. Once considered a niche portion of T&H, luxury hotels are exploding in popularity despite ongoing macroeconomic headwinds.

Industrial and Office Both Slow, But for Very Different Reasons

The commercial real estate sector is being affected by shifting economic conditions and evolving business needs. A recent analysis comparing the office and industrial sectors showed that both are experiencing a softening trend, albeit for different reasons.

Industrial sector analysis: Colliers reports that industrial sales have outperformed office sales in 13 of the past 15 quarters, marking a significant shift from the historical trend. While industrial properties have softened due to increased inventory, occupancy rates remain strong, surpassing pre-pandemic levels. Industrial rents have grown by 27% in the last year, but rent growth is anticipated to decelerate with more supply entering the market.

Office sector analysis: Office vacancies at the end of Q1 reached 16.1%, just shy of the record level. Unlike industrial, the decline in office is due to decreased demand. Though asking rents remain high, tenants can negotiate concessions, leading to lower effective rents. Delinquency rates rose from 1.6% to 2.9% in Q1, while net absorption was negative, with only 14% of markets showing positive absorption. Transwestern's data suggests a 13.4% vacancy rate, up 50 basis points. Asking rents grew 1.4% YoY, signaling a slowdown.

➥ THE TAKEAWAY

Zoom out: The industrial sector is experiencing positive growth with a vacancy rate of 4.2%, below the 20-year average. Asking rents have reached record levels at $8.45, driven by a significant decline in construction starts. In contrast, the office market faces challenges due to decreased demand, leading to rising delinquency rates and negative net absorption. These dynamics highlight the contrasting trends in commercial real estate.

⏩ Share this article by clicking here.

Tenants in Greater LA Owe $1B in Unpaid Rent Due to Pandemic

During the pandemic, landlords in Los Angeles (LA) and Orange County faced challenges due to the eviction moratorium. As a result, they are currently owed over $1 billion in unpaid rent.

Collection teams in action: To recover the outstanding rent from tenants, companies like Universe Holdings, which owns and manages over 1,000 units in LA, have established collection teams. These teams stay updated on new regulations from various government agencies and employ different methods such as email, text messages, door knocking, meetings, and more to contact tenants and collect overdue payments.

Evictions are rare but still occur: While some landlords resort to unconventional means to collect unpaid rent, others choose to evict tenants who have not paid during the pandemic. However, landlords must adhere to specific rules set by the city. For instance, in South LA, landlord Ky Trang Ho successfully evicted five tenants who failed to pay rent during the pandemic, while others disputed the decision in civil court, resulting in only one tenant being required to vacate.

Government funding, please: Fortunately, LA property owners can seek government funding to recover their losses. Moss & Co., a property management firm for multifamily buildings, has managed to recover over $3 million through this avenue. However, since California's Housing is Key relief program stopped accepting applications last year, Moss's clients still have $5 million of past due rent remaining uncollected. Consequently, many building owners are postponing or canceling essential upgrades and repairs to manage the financial shortfall.

➥ THE TAKEAWAY

Between a rock and a hard place: Universe Holdings has successfully collected up to 83% of late rent from LA tenants in recent months. Nevertheless, the disruptions caused by the pandemic continue to impact landlords. Introducing new municipal programs like LA's just-cause eviction rules will further strain the already fragile landlord-tenant relationships. Landlords and management companies have no alternative but to collaborate with delinquent tenants to avoid costly legal proceedings resulting in losses for everyone involved.

⏩ Share this article by clicking here.

• Crossing the Rubicon: NJ-based Cross River Bank, with $1.1B in real estate loans, faces FDIC scrutiny for "unsafe or unsound banking practices.”

• Lights, Camera, Rebound! A weeklong writers' strike lowered demand for studio real estate, but analysts expect a rebound for the 3 MSF US, Canada, and UK studio space once the strike ends.

• In with the new: Chicago's population expands despite Cook County's population loss, prompting attractive opportunities for younger residents as housing costs fall.

• Deal of the day: Miami’s property market is booming, with a waterfront site under contract above $1B, indicating a maturing market and strong growth potential.

• Alright, the party’s over: Atlanta-based Invesco (IVZ) is the latest big-name firm to ask that its employees get ready to start spending more time back in their offices.

• Ravenswood Gardens: Tricap Residential Group is selling 7-building, 151-unit Ravenswood Gardens in Chicago for $20M, 53% higher than its 2013 purchase price.

• Take the money and just do it: The NYC Economic Development Corp. just launched M-CORE, offering tax incentives to revamp outdated, underperforming office spaces in Midtown.

• Kendall Roy would be proud: Apartment REIT Camden Property Trust (CPT) is seeing more Q1 moveouts as moratoriums expire but spins it as an opportunity to get paying tenants instead.

• No longer stuck in limbo: The FDIC steps in to sell the leasehold of a First Republic Bank branch at East 79th St and Lexington Ave, a prime real estate site, to help repay its creditors.

• Storage wars: The self-storage sector had a record-setting 2022, with over 112.7 MSF of space trading for $10.3 B. NY topped the list, followed by Phoenix, Atlanta, Miami, and Denver.

• New legislation: CO’s Gov. is expected to sign a bill that will let county officials regulate short-term rentals, requiring owners to have a rental license or permit and prohibiting online platforms from listing unregistered properties.

• Not backing down: Private REITs raised $6.3B in Q1, according to Robert A. Stranger & Co., but regulatory reforms could create future fundraising difficulties.

• All the cool kids are doing it: US malls are swapping out vacant stores with skydiving, virtual golf, breweries, and the fastest-growing sport in the country: pickleball.

• Swiftonomics: In April 2020, U.S. hotel occupancy hit a record low while Taylor Swift's Lover Fest tour was postponed, but now, three years later, Swift's Eras Tour has reignited the hotel industry and city economies wherever it goes.

• Deep freeze: Debates on raising the U.S. debt ceiling could impact homeowners, as a potential debt default may cause mortgage rates to rise to 8.4%, leading to a 22% increase in mortgage payments.

HIT THE INBOX OF 65K+ CRE PROFESSIONALS

Advertise with CRE Daily to get your brand in front of the Who's Who of commercial real estate. Subscribers are high-income decision makers, investors, and C-suite executives always looking for their next investment, product, or tool.