San Francisco ended 2023 with the highest commercial real estate vacancy rate in the city’s history.

San Francisco’s amount of vacant office space has reached the highest level ever recorded in the city’s history.

According to preliminary fourth quarter data provided by real estate brokerage CBRE, the city’s vacancy rate ticked up nearly 2 percentage points from the previous quarter, reaching 35.9% at year-end. In September, that number was at 33.9%, which was also the previous record high.

Since then there has been more signs the city is in trouble. The former Westfield Mall, which was abandoned last year by most of its tenants and which was then surrendered by owners to their lenders, lost 75% of its value since 2016.

San Francisco’s biggest mall saw its value slashed by about 75% in December, to $290 million – marking a loss of nearly $1 billion since the property was last financed by Wall Street lenders, according to Morningstar Credit…

In the wake of the pandemic, fortunes have shifted downward not just for mall owners, but also the urban cores of cities like San Francisco, where officials are forecasting an $800 million budget deficit over the next two years, in part due to record office vacancies.

And last week another big employer in the city announced it was going to shrink its office space footprint.

Yelp Inc. made drastic changes to its San Francisco real estate footprint in 2021 when it relocated its corporate headquarters on New Montgomery Street into a nearby office roughly one-fourth the size.

Now the business review site is further shrinking its office space. About 18,000 of Yelp’s new, 53,000-square-foot office at 350 Mission St. is up for sublease…

The recent listing at a building owned by Salesforce Inc. means that in just three years, Yelp has sought to reduce its office space in San Francisco by 78%.

But these are just signs and portents of what is yet to come. The SF Standard reports there is at least $3.5 billion worth of commercial real estate debt which is coming due in 2024.

There is currently $3.5 billion in commercial mortgage-backed security debt in San Francisco that is coming due by the end of this year, according to Securities and Exchange Commission filings gathered by Bloomberg. Importantly, this is just a fraction of the larger commercial mortgage market, as much of the debt is directly held on bank balance sheets.

Unlike residential home loans, owners of commercial mortgages pay mostly only interest until near the end of the loan term, when a large payment, usually equal to the original loan amount, comes due.

While the looming mortgage debt fallout is not expected to be as bad for the overall economy as it was during the Great Recession, experts say the risk of these debts not being settled in time could lead to some developers getting wiped out, more forced sales of buildings and potentially billions in losses for investors.

“We’re definitely more in the acceptance phase of it now,” said Kurt Altvater, who heads West Coast commercial mortgage sales at CBRE real estate company. “Things are being informed by actual sales comps—which as painful as that is—is what is needed to move forward.”

Owners who can cover their debt will probably try to do so but the fact that vacancy rates are so high means many of them may not have enough income to make it work. Also, given the steep decline in property values, it may not make sense to keep paying prices negotiated when properties were worth double what they are now. In short, there’s a fair chance more people are going to walk away and hand these properties over to lenders/banks.

All of this will then have additional consequences for banks, investors, renters, owners and for the city itself which relies heavily on income from businesses operating within the city. I’ll say again that I think San Francisco will recover and eventually thrive but in the near term the outlook doesn’t seem good.