Elon Musk and Trump play a leading role in the recent crisis in the San Francisco office market

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The latest signs of distress in the San Francisco office market include a $1.7 billion mortgage default and growing problems with the city’s only office building, co-owned by former President Donald Trump.

Columbia Property Trust, owned by investment management firm Pimco, defaulted on a loan for seven commercial office buildings amid broader market turmoil. The most valuable asset in this portfolio is 650 California St., a 34-story office building in the Financial District. The portfolio also includes 201 California St. in San Francisco, as well as real estate in New York, Boston and Jersey City.

“We, like most office owners, are addressing unique and unprecedented challenges currently facing our asset class and client base,” a Columbia Property Trust spokesperson said in a statement. “We have partnered with our lenders to restructure our loan for seven properties in our larger national portfolio.”

The mortgage problems Colombia is facing are part of a wider shift in commercial real estate due to telecommuting, which means reduced demand for rentals and empty office buildings. This puts landlords in a difficult financial position as cash flows decline as their loans mature.

“You are really talking about a national problem. The biggest story is that people just don’t need that much space,” said Manus Clancy, senior managing director at commercial real estate data firm Trepp. “The number of firms increasing square meters versus decreasing seems to be about 9 to 1.”

These structural factors mean that lenders are less interested in refinancing real estate. Clancy said that in order to receive funding in the current office real estate market, the property must be exceptional, which usually means a newly built building, high-quality amenities and high demand from tenants.

But Columbia’s construction portfolio has another major anchor weighing it down: Twitter, which allegedly started skipping rent payments after Elon Musk took over the company last year.

Twitter is one of the largest tenants of seven properties in the portfolio, leasing space at 650 California St. and 245-249 W. 17th St. in NYC. Columbia has already filed a lawsuit against the social network for non-payment of rent.

Bloomberg, which first reported on the default, noted that Columbia’s mortgage loan has “floating rate debt,” meaning variable interest rates. As federal interest rates have risen in an attempt to quell inflation, these loans have become much more expensive to maintain.

Trump’s bet

One example of how higher interest rates have hurt the financial stability of these buildings can be seen at 555 California Street, which is 70% owned by the Vornado Realty Trust and the rest by the Trump Organization.

The former headquarters of Bank of America was recently placed on a special maintenance list, indicating that loan holders are keeping a close eye on the office complex.

Clancy said that based on Trepp’s data, the $1.2 billion loan for the office complex was originally made in 2021 with a maturity date of 2023. until 2028.

In 2021, Vornado and Trump likely put in place an interest rate cap, essentially an insurance measure that protects the property owner from an interest rate hike. But that only lasted for the first two years of the loan, Clancy said.

Now, when this period ends, the cost of insurance against the next increase in interest rates increases exponentially.

“Some borrowers are finding they don’t count because of the slowing economy, tenant exits and higher interest rates,” Clancy said. “Don’t send good money after bad money.”

Although the building is almost entirely leased out, Clancy said many of those leases will expire in the next three years. Morgan Stanley, for example, recently extended the lease, but only until 2028.

“If you go to your boss and say that I gave Vornado a $1 billion loan for real estate in San Francisco, where there is a lot of space for sublease, tenants return the space, and the lease term is on average three or four years, I think that your boss Advise you to start writing your resume, Clancy said.

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