Banks have many reasons to worry. Rising interest rates have devalued other assets on their balance sheets, especially government bonds, leaving them vulnerable to bank runs. In recent months, Silicon Valley Bank, First Republic, and Signature all collapsed. Regional institutions like these account for nearly 70 percent of all commercial-property bank loans. Pushing down the valuation of office buildings or taking possession of foreclosed properties would further weaken their balance sheets.
Municipal governments have even more to worry about. Property taxes underpin city budgets. In New York City, such taxes generate approximately 40 percent of revenue. Commercial property—mostly offices—contributes about 40 percent of these taxes, or 16 percent of the city’s total tax revenue. In San Francisco, property taxes contribute a lower share, but offices and retail appear to be in an even worse state.
Empty offices also contribute to lower retail sales and public-transport usage. In New York City, weekday subway trips are 65 percent of their 2019 level—though they’re trending up—and public-transport revenue has declined by $2.4 billion. Meanwhile, more than 40,000 retail-sector jobs lost since 2019 have yet to return. A recent study by an NYU professor named Arpit Gupta and others estimate a 6.5 percent “fiscal hole” in the city’s budget due to declining office and retail valuations. Such a hole “would need to be plugged by raising tax rates or cutting government spending.”

Post-pandemic, kids are back in school, retirees are back on cruise ships, and physical stores are doing better than expected. But offices are struggling perhaps more than most casual observers realize, and the consequences for landlords, banks, municipal governments, and even individual portfolios will be far-reaching. In some cases, they will be catastrophic. But this crisis, like all crises, also represents an opportunity to reconsider many of our assumptions about work and cities.
During the first three months of 2023, U.S. office vacancy topped 20 percent for the first time in decades. In San Francisco, Dallas, and Houston, vacancy rates are as high as 25 percent. These figures understate the severity of the crisis because they only cover spaces that are no longer leased. Most office leases were signed before the pandemic and have yet to come up for renewal. Actual office use points to a further decrease in demand. Attendance in the 10 largest business districts is still below 50 percent of its pre-COVID level, as white-collar employees spend an estimated 28 percent of their workdays at home.
With a third of all office leases expiring by 2026, we can expect higher vacancies, significantly lower rents, or both. And while we wrestle with the effects of distributed work, artificial intelligence could drive office demand even lower. Some pundits point out that the most expensive offices are still doing okay and that others could be saved by introducing new amenities and services. But landlords can’t very well lease all empty retail stores to Louis Vuitton and Apple. There’s simply not enough demand for such space, and new features make buildings even more expensive to build and operate.
With such grim prospects, some landlords are threatening to “give the keys back to the bank.” Over the past few months, the property giants RXR, Columbia Property Trust, Brookfield Asset Management, and others have collectively defaulted on billions in commercial-property loans. Such defaults are partly an indication of real struggles and partly a game of chicken. Most commercial loans were issued before the pandemic, when offices were full and interest rates were low.
The current landscape is drastically different: high vacancy rates, doubled interest rates, and nearly $1.5 trillion in loans due for repayment by 2025. By defaulting now, landlords leverage their remaining influence to advocate for loan extensions or a bailout. As John Maynard Keynes observed, when you owe your banker $1,000, you are at his mercy, but when you owe him $1 million, “the position is reversed.”

Park Hotels & Resorts, the owner of two of San Francisco’s biggest hotels — Hilton San Francisco Union Square and Parc 55 — has stopped mortgage payments and plans to give up the two properties, in another sign of disinvestment in hard-hit downtown.
Park Hotels & Resorts said Monday that it stopped making payments on a $725 million loan due in November and expects the “ultimate removal of these hotels” from its portfolio. The company said it would “work in good faith with the loan’s servicers to determine the most effective path forward.”
The 1,921-room Hilton is the city’s largest hotel and the 1,024-room Parc 55 is the fourth-largest, and together they account for around 9% of the city’s hotel stock. The hotels could potentially be taken over by lenders or sold to a new group as part of the foreclosure process.
“After much thought and consideration, we believe it is in the best interest for Park’s stockholders to materially reduce our current exposure to the San Francisco market. Now more than ever, we believe San Francisco’s path to recovery remains clouded and elongated by major challenges — both old and new,” said Thomas Baltimore Jr., CEO of Park Hotels, in a statement.
Those challenges include a record high office vacancy of around 30%, concerns over street conditions, a lower rate of return to office compared to other cities and “a weaker than expected citywide convention calendar through 2027 that will negatively impact business and leisure demand,” he said.
Park Hotels said San Francisco's convention-driven demand is expected to be 40% lower between 2023 and 2027 compared to the pre-pandemic average.
San Francisco Travel, the city’s convention bureau, expects Moscone Center conventions to account for over 670,000 hotel room nights this year, higher than 2018’s 660,868 room nights but far below 2019’s record-high 967,956. And weaker convention attendance is projected for each following year through 2030.
Tourism spending more than doubled in 2022 to $7.4 billion compared to the previous year. A full recovery isn’t expected until 2024 or 2025.
The company expects to save over $200 million in capital expenditures over the next five years after giving up the hotels, and to issue a special dividend to shareholders of $150 million to $175 million. The company's exposure will shift away from San Francisco towards the higher-growth Hawaii market.
Parc 55 is a block from Westfield San Francisco Centre, the mall where Nordstrom is departing, and the block where Banko Brown, an alleged shoplifter, was killed in a shooting outside a Walgreens in April. Nearby blocks are also full of empty storefronts, as tourist and local foot traffic hasn’t fully recovered.
Other hotels have faced financial distress. Atop Nob Hill, the historic Huntington Hotel was sold earlier this year after a mortgage default.

The iShares Floating Rate Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, investment-grade floating rate bonds with remaining maturities between one month and five years.