The Economy

So re: commercial real estate defaults. ... I found this one really interesting.

Owner to give up two of S.F.’s largest hotels as city’s ‘path to recovery remains clouded’

There has been a wave of CMBS defaults in San Francisco because of higher refinancing costs in the wake of higher interest rates. ... Yesterday, it was the owner of two big hotels in San Francisco, the Hilton San Francisco Union Square and Parc 55 saying it has decided to strategically default on a $725 million loan. They had been threatening this for the last month and it resolved with them. ... just handing over the keys.

It is fucked up all around, because they are saying that San Francisco has become such a lawless shitshow that convention bookings (what they rely on) have fled and they can't justify ongoing capital improvements to the hotels.

Which may be true. ... one of the hotels is a block away from the mall that Nordstrom is fleeing from, and it's a block away from where an alleged shoplifter was killed in a shooting outside of a Walgreens a few months ago. It's a neighborhood of empty storefronts and none of the tourists that used to be all around.

But what none of the stories are focusing on is that the loan they are defaultiing on was a fixed-rate low-interest loan (that in real terms paid them to borrow money) that is slated to mature in November, and they know that their debt servicing costs are going to explode when they have to roll over that debt. They were playing with house money thanks to the Fed and the malinvestment zero interest rates fueled. So to me, it sounds like they preemptively are using how bad things have gotten in San Francisco to justify a default that was going to happen regardless.

What I always come back to. ... it should NOT be that easy to just walk away from a $725 million loan when for the time being at least, you still have the ability to keep making good on the terms you agreed to. I mean, there shouldn't be anything stopping you from doing that. ... except the fact that you are in a debt-financed business and if the Fed hadn't turned our debt markets into a centrally-planned casino, an actual market with price discovery would make it so that anyone who behaves that way would never be able to procure a loan for even a dollar again.

But there will be no consequences for Parc Hotels, and because of that, they rationally know that they will be able to actually pay out a special dividend of a couple of hundred million dollars because of the default (so their owners will even be rewarded for defaulting), it actually will reduce their leverage ratio, and their ability to tap the debt markets will only suffer a little and not for very long. They can just move right on, and concentate on other markets like Hawaii, where they think their prospects are better.

 

The inflation tax is the most regressive tax there is to pay for the populism and trillions of dollars of government debt. It hits the poorest people hard.

 

If only way more people 1) understood everything he is talking about, and 2) listened to him. ... we would never have gotten ourselves into the economic problems we are now facing.