“We kind of tucked our tails between our legs and were like, ‘This is another hit that we gotta handle.’”
That’s what San Francisco small-business owner Kevin Cline told SFGate after his neighborhood pub, Rock Bar, was ransacked late last month. The so-far unidentified criminals broke down the place’s front door and proceeded to steal the cash register, cash box, safe, and several bottles of pricey alcohol.
Total damages, Cline reported, were about $15,000.
He’s not the only institution suffering in San Francisco these days. Two weeks later, NBC’s Bay Area team noted that “a number of small businesses in San Francisco’s Mission District are raising concerns after a recent string of break-ins” – the same district Cline operates out of.
The last such target was an ice cream shop. And while the owner had removed his cash before closing up for the day, leaving the thieves with little but a bag of cookies to steal, he said it still broke his heart to see his beloved business abused like that.
Police say that crime in the larger metropolitan area is greatly reduced from last year’s onslaught. But it’s still not good, and like Cline told reporters, it’s just one more issue for the locals to deal with.
I have to assume he was alluding to the rampant homeless problems… the heightened minimum wage… and the larger businesses fleeing the state, which naturally affect everything and everyone else. All of which has amounted to an overwhelming amount of bad PR – often deservedly so.
My daughter had to go to San Francisco last year for business; and let me state quite clearly she was not impressed. The hotel she stayed at, which was a nice place in and of itself, couldn’t keep out the noises of a very troubled city all night long.
Screaming. Yelling. Sirens.
She’s not planning on going back anytime soon. And she’s hardly alone.
California Is in Crisis
I’ve been to California several times, including San Francisco several years ago. It’s a beautiful state with so much to offer.
To quote Governor Gavin Newsom back in May:
From our world-renowned coastline to the world’s tallest trees to our iconic cities and theme parks, California is the nation’s coming attraction. Visitors from all over the world are coming here to experience the wonder of the Golden State, boosting our economy and creating good-paying jobs for years to come.
He said that at San Francisco’s Golden Gate Bridge in response to a report by tourism analyst Dean Runyan Associates. California’s tourism spending, it turns out, hit $150.4 billion in 2023 – an all-time record.
Except…
The only problem was a disclaimer on page 13 of the report itself, which read, “Adjusted for inflation, travel spending in 2023 was down 14% from the peak (in 2019).”
That’s a significant drop. And it shows very distinctly in certain parts of the economy, such as San Francisco’s hospitality business.
The Wall Street Journal wrote an analysis of its own last week titled, “San Francisco Is Sinking in Bad Hotel Debt.” From WSJ:
The sharp drop-off in visitors since before the pandemic is squeezing the city’s hospitality sector. Weekend hotel occupancy in June, a rough proxy for leisure travel, is down around 22% since 2019 in the San Francisco-San Mateo region, versus 4% nationwide, according to data firm CoStar Group.
And:
Leisure travel has failed to pick up from last year’s lows, despite recovery in other markets, with tourists put off by quality-of-life issues. And while the city expects conferences to turn around next year, these events are down from last year and pre-pandemic.
As a real estate guy who regularly analyzes the hotel industry along with apartments, office buildings, and the like, none of this surprises me. I’ve actually been warning readers away from traditional urban centers like San Francisco for a while, with few exceptions.
The Stress Is Really Starting to Show
San Francisco. San Diego. New York City. Washington D.C….
These big-name American locations used to be great places for people to do business, both directly and indirectly. Companies could profit by being there, and investors could profit by putting their money into those companies.
But that equation isn’t nearly so simple anymore.
For San Francisco specifically, WSJ reports that:
Fewer conferences and visitors mean fewer nights. The city’s two largest hotels, the Hilton Parc 55 and Hilton San Francisco Union Square, combined have lost $1 billion in value, according to the Kroll Bond Rating Agency, which valued them at $553.8 million.
Both are owned by Park Hotels & Resorts (PK), a real estate investment trust (REIT) I’m very familiar with – and one I’ve been recommending against buying for some time due to the cities it operates in. Though I still have to give management credit where credit is due since it recently sold the Parc 55 and Union Square properties.
CEO Tom Baltimore believes the San Francisco and Los Angeles markets alike will “lag for some time.”
I’d have to agree.
That’s very bad news for hotel owners who are staying put. There’s a whole lot of industry debt coming due, with shrinking funds to pay it down.
According to data from real-estate analytics firm Trepp, the San Francisco metropolitan area’s lodging sector saw delinquency rates on commercial mortgage-backed security loans go from 5.7% last June to a whopping 41.6% two months ago.
This is the worst by far out of every other Top 25 city in the U.S. Trepp found that, overall, the national lodging delinquency rate was rising… but only to 6.25%.
That debt situation isn’t healthy or even sustainable by any metric. Not for the businesses unable to pay down their debt. Not for the banks who backed them. Not for the investors who bought into them.
That’s why I’m putting my money elsewhere… far, far away from San Francisco and its hotels.
Regards,
Brad Thomas
Editor, Wide Moat Daily