San Francisco Apartment Tower's Valuation Fell 50%

The worth of NEMA, one of San Francisco's premier apartment towers, has seen a drastic reduction, as revealed by commercial real estate analytics firm Trepp. Located at 8 10th Street in downtown San Francisco, the building's value plummeted from $543.6 million in 2018 to $279 million. The diminished value has resulted in the debt associated with the property surpassing its market value.

Initially Reported By The Real Deal

The 754-unit complex was inaugurated in 2013 during a period of revitalization in the Mid-Market district. This resurgence was partially fueled by the technology industry boom and tax incentives like the "Twitter tax break." The luxury building offers several amenities such as public plazas, a fitness center, and a 60-foot swimming pool, and is situated across from Twitter's headquarters.

However, the COVID-19 pandemic drastically impacted the area. Tech giants like Uber, Block, and DoorDash vacated the neighborhood, and a nearby Whole Foods closed down within a year of its opening due to concerns about public safety and unsanitary conditions on the streets.

Another Concern

NEMA's debt-service coverage ratio, an indicator of the property's ability to cover its debt through generated cash flow. This ratio has been under 1 since 2020, posing a risk to the developer's capacity to maintain control over the building.

Trepp's data shows a slight improvement in occupancy rates, which were 92% at the start of 2023 compared to 90% in 2021 and 72% in 2020. Despite this, the property has faced a steep revenue decline, with earnings dropping from $36.8 million in 2019 to $29.2 million in 2022.

Loan information reveals that the principal loan on the property is overdue, and efforts are being made to avoid loan default by transferring the deal to special servicing.

Crescent Heights, the company that owns NEMA, had originally bought the property in 2006 with plans to construct condominiums. However, due to economic setbacks caused by the Great Recession, the project only commenced in 2011.

Financial Crunch

The present issues affecting the commercial real estate sector are forcing many property owners into a financial crunch, marked by declining revenues and burgeoning debt. This situation has led some owners to default on their payments, ultimately relinquishing their properties back to lenders, as has been the case with Park Hotels and Resorts and a newly built condo complex in Mission Bay. This is complicating the commercial tax landscape in San Francisco.

The sharp decline in property values, such as seen with NEMA, is contributing to a negative feedback loop that is pulling the city into a downward spiral. With lowered property values, property owners are finding it increasingly important to appeal their commercial property taxes to reduce financial burdens.

This added necessity for tax appeals further deteriorates investor sentiment, making the investment environment even less attractive. The cycle of devaluation, increased debt, and tax appeals is thereby not only affecting individual property owners but also harming the overall economic vitality of the city. Given this backdrop, it's crucial to scrutinize the broader systemic issues affecting commercial real estate in San Francisco, as piecemeal solutions may not be sufficient to halt or reverse this negative trend.

FAQ

Q1: What has caused the dramatic decrease in NEMA's property value?

The value of NEMA, a luxury apartment tower in San Francisco, has drastically fallen from $543.6 million in 2018 to $279 million. This decline is attributed to a range of factors, including the exodus of major tech companies like Uber, Block, and DoorDash from the area, and the closure of nearby businesses such as Whole Foods due to safety and sanitation concerns.

Q2: How is NEMA's declining value affecting its debt situation?

The diminished property value has pushed NEMA into a precarious financial situation. The loan balance now surpasses the property's market value, making the debt more expensive than the property itself. The debt-service coverage ratio, a key indicator of the property's ability to meet its debt obligations, has been under 1 since 2020.

Q3: What is the "Twitter tax break," and how did it initially benefit properties like NEMA?

The "Twitter tax break" was a tax incentive aimed at stimulating economic growth in San Francisco's Mid-Market district. It helped attract tech companies and spurred the development of luxury residential buildings like NEMA, which was launched in 2013 and offered a range of amenities to attract tenants.

Q4: What impact has the COVID-19 pandemic had on NEMA and the surrounding area?

The pandemic has had a severe impact on NEMA and the Mid-Market district. Major tech tenants vacated the neighborhood, and the occupancy rate at NEMA dipped to as low as 72% in 2020. While the occupancy improved slightly to 92% in 2023, revenue declined steeply from $36.8 million in 2019 to $29.2 million in 2022.

Q5: How is the decline in property values like that of NEMA affecting San Francisco's commercial real estate landscape?

The sharp fall in property values is triggering a downward spiral in the city's commercial real estate sector. It's leading to an increase in the number of tax appeals as property owners seek to reduce their financial burdens. This situation is eroding investor confidence and complicating San Francisco's commercial tax landscape, having broader implications on the city's overall economic vitality.