BPM recently hosted a Real Estate Roundtable that brought together some of San Francisco’s top commercial real estate owners, investors, developers and professionals for an insightful discussion and market analysis. The premier event was held in BPM’s San Franciso office and led by Mark Leverette, BPM’s real estate leader.
The roundtable offered a unique platform for San Francisco-based principals, CFOs, bankers, investment leads, private equity and others to explore some of the most pressing issues facing the real estate industry today, from banking challenges to the ever-evolving office space landscape in San Francisco and beyond.
Here are some of the highlights of their lively discussion:
Banking and lending: A delicate balance
Regional banks, which hold about $2.7 trillion in assets — a quarter of average lenders’ assets — are facing significant challenges. The refinancing gap is a major concern, exacerbated by rising cap rates and loans issued during low-interest rate periods. In fact, JLL estimates this shortfall could be anywhere from $207 billion to $570 billion.
At the same time, regulatory scrutiny is leading to more conservative lending practices. Banks are grappling with reserve requirements and delinquent loans, raising concerns about potential bank failures if default rates continue to climb. This is creating ripple effects throughout the real estate industry.
Roundtable participants also expressed concern about the upcoming ‘wall of maturity’ in commercial real estate loans. According to Bloomberg, approximately $600 billion in loans will mature annually until 2028, totaling $2.3 trillion. To put that in perspective, delinquent commercial real estate loans were estimated at $24 billion in 2022, with potential aggregate losses of $80-260 billion for banks in downside scenarios.
As one participant put it, “As real estate professionals, we must be prepared to navigate this challenging landscape. This means working closely with lenders and investors to find innovative solutions and mitigate risks.” Borrowers should be mindful to keep their credit histories clean to capitalize on the coming opportunities.
Office space trends
The office market tells an interesting story. San Francisco has experienced 12 consecutive quarters of negative absorption. This reflects broader national trends of office occupancy hovering around 50% of pre-COVID levels. However, a dichotomy has emerged in the office market. It can be difficult to attract tenants for commodity space.
Nevertheless, high-end office space, particularly above the 20th floor, continues to command premium rents. Some buildings are seeing rates as high as $112-$140 per square foot for top floors, per several attendees familiar with the space. This contrast underscores the importance of quality and location in the specific geographic office market.
Roundtable participants also addressed the growing concern of functional obsolescence in older office buildings within the city. As companies prioritize modern amenities and flexible spaces, they’re leaving many older structures behind. This is posing both challenges and opportunities for reuse. One participant commented, “We certainly want to know if our space is on the functional obsolescence list, and it is hard to decern sometimes.”
Attendees also discussed the ongoing challenges some San Francisco businesses face in getting employees to return to the office. Some companies are exploring economic incentives, while others are mandating office attendance for new hires. It’s a delicate balance between productivity concerns and employee preferences. Meanwhile, many office buildings continue to sit empty.
Roundtable participants explored the potential for converting vacant commercial spaces to residential use. Attendees agreed that office-to-residential conversions are challenging, and hotel-to-residential projects are generally more feasible. However, there are concerns about the desirability and practicality of such conversions. As one attendee commented, “No one wants to live in a hotel.”
Converting office buildings to residential use also involves obstacles around location. As attendees discussed, it can be difficult to attract residents to places that have traditionally been purely commercial, such as San Francisco’s Financial District.
A market in transition
With a 30%+ office vacancy rate and many leases set to expire by 2030, San Francisco faces unique challenges. However, there are opportunities on the horizon. The local government is becoming more pro-business in terms of zoning and conversions, potentially opening new avenues for development and reuse. Additionally, signs are showing some “stabilization,” including rising demand for office space with vacancies expected to peak soon and asking rates expected to calm within the next few quarters, according to CBRE.
Ultimately, roundtable attendees agreed we are looking at a market in transition. Various neighborhoods within San Francisco are performing quite differently, creating pockets of opportunity for astute investors and developers. It’s a complex landscape, but one that offers potential for those who can navigate it skillfully. Real estate professionals must remain agile and innovative to navigate this transitional period. By staying attuned to market trends, embracing flexibility and exploring creative solutions, the industry can work toward a more stable and prosperous time to come.
How BPM can help
With its deep knowledge of public accounting and real estate advisory services, BPM is ready to assist clients in addressing these challenging market conditions. From financial reporting and tax strategies to regulatory compliance and transaction support, our real estate team offers the insights and solutions needed to thrive.
Real estate professionals can confidently tackle the hurdles ahead by partnering with BPM. Contact us today to learn more.
