If the borrower misses or stops making payments, the loan goes into default, the painful foreclosure process begins, and the property is reverted to the lender, who may then auction it off if they don't want to keep it.
One notable example was Brookfield Properties and Westfield America's decision to sell off San Francisco Centre Mall, after lenders Wilmington Trust and Wells Fargo sued Westfield for violating loan terms and a court appointed Trident Pacific Real Estate Group to manage the property.
More recently, the Kibelstadt Group, led by the husband-and-wife team that runs Kibelstadt Cellars in Sonoma, is reportedly more than three months behind on a $19.6 million loan payment tied to a downtown office building it owns at 140 Second Street, just south of Salesforce Tower.
The Kibelstadt Group purchased the building, which was fully leased at the time, for $28.3 million in 2014. The San Francisco Business Times reported that the building's occupancy rate had fallen to 32% by the end of September 2023.
Altbuter said most commercial property owners reach a breaking point when a property's net operating income can no longer cover the mortgage payments. He added that while a property owner's liability is generally limited to a specific property, walking away from an agreed-upon deal could negatively impact future credit decisions.
San Francisco has the fourth-highest number of commercial loans waiting to be refinanced this year among major U.S. cities, with 18, behind Manhattan, Houston and Los Angeles, according to Bloomberg data. Sunnyvale, a nearby city home to some of Silicon Valley's biggest companies, ranks fifth with an estimated 10 loans coming due.
“The whole real estate industry is facing a refinancing risk problem,” said Ken Rosen, director of the Center for Real Estate and Urban Economics at the University of California, Berkeley. “2024 will be a time of consolidation.”