Trepp: Correlation Between Crime Rates, Property Performance In San Francisco

Rising crime in many San Francisco neighborhoods could be partially to blame for the sluggish recovery from the pandemic for the city’s commercial real estate sector. 

The majority of San Francisco neighborhoods with declining business activity are surrounded by high-crime areas, according to an analysis from the commercial real estate research firm Trepp. The shrinking activity is affecting office, hotel and retail assets and has the potential to depress real estate values, creating challenges for a wide range of property owners with loans due in the next two years. 

"We have identified a compelling relationship between negative property news events and areas with high crime densities," Trepp researchers wrote in the report. "To delve even deeper into this relationship, we meticulously pinpointed 'crime shadow' locations where we observed a discernible impact of crime on local businesses, leveraging advanced spatial correlation analysis methods."

Property crimes are concentrated in Union Square, the northern part of the South of Market neighborhood, Japantown and Fishmerman’s Wharf, according to Trepp's analysis, which used San Francisco Police Department incident data. The Tenderloin, Mission District and South of Market accounted for 33% of the city’s violent crime. 

While violent crime in the city’s downtown neighborhoods is rising from the levels seen during the pandemic, the Trepp data shows that the area has actually seen crime decline when compared to 2018. Union Square, Chinatown and the Financial District all saw over 30% declines in crime in 2022 compared to 2018, according to the data.

Business owners and landlords, however, are seeing the impact of crime on their bottom line. More than 65% of high-crime areas experienced flat or declining business growth between 2018 and 2022, including a decline in the number of businesses in 40% of high-crime neighborhoods.

“This finding indicates that the majority of locations with declining businesses are surrounded by high-crime areas, emphasizing the detrimental effects of persistent crime on business vitality,” the report’s authors wrote.  

While crime rates correlate with a decline in business performance, it’s not the only factor. Over 43% of neighborhoods experienced declines in both crimes and businesses over the five-year period, and 5% of neighborhoods saw both crime and business activity increase. 

Hotel performance is especially sensitive to crime rates in the areas they occupy, the report says, presenting a significant issue for hotel owners in the city. Six out of seven hotels with loans scheduled to mature before 2026 are situated in or adjacent to neighborhoods with high crime rates, according to the report. 

The owner of the 1,910-key Hilton San Francisco Union Square and the 1,024-room Hilton Parc 55 San Francisco — which are within a block of each other in the neighborhood with the highest crime density across San Francisco — stopped making debt payments on its $725M loan and said it plans to hand over the buildings to the lender.

“The performance of lodging properties is more adversely affected by crime rates than other property types,” the report says. “For instance, a small decline in crime may be accompanied by a huge improvement in lodging properties’ financial performance.” 

Multifamily properties are also experiencing distress in high-crime-rate areas. More than 7% of multifamily loans are in distress in San Francisco, according to Trepp, and a high concentration of the properties in distress are in the Tenderloin, "which is identified as the epicenter of crime-affected business areas."

The Union Square neighborhood has also seen declining activity in both the office and retail sectors. 

T-Mobile is vacating a 17K SF street-level store at 1 Stockton St., a property carrying $66M in CMBS debt, and Nordstrom announced that it would close its location at the Westfield San Francisco Center following the departure of other chain stores, including Anthropologie and Old Navy. The occupancy rate at that property has declined from 95% to 53%, according to the Trepp report, which noted that Nordstrom’s exit “will make the property less attractive to other retail tenants.” 

Westfield Corp., the property’s owner, stopped making payments on a $558M loan attached to the property in June, citing “challenging operating conditions in downtown San Francisco.” 

The situation is similar in the office-heavy Financial District, where crime rates increased by more than 29% from 2021 to 2022. The One Market Plaza office building, which has $975M in debt associated with it, is facing the loss of its second-largest tenant after Visa put its entire office there on the market for sublease. Google, the property’s largest tenant, could also downsize its space there as part of a broader cost-cutting strategy, the report says. 

The nearby 420K SF office building at 211 Main St. could be facing similar headwinds after Charles Schwab, the building’s sole tenant, announced that it would be downsizing its San Francisco office footprint. 

“Ultimately, the vacancy will inevitably lead to a decline in property value,” the report’s authors wrote.

The report highlights that the decline in tenancy and new business growth can’t be solely attributed to rising crime rates, but the authors said that it could further hamper the recovery of neighborhoods that are perceived to have growing safety issues. 

"These vacancies and the downsizing of prominent tenants highlight the significant challenges faced by office properties in the Financial District, mainly caused by the work-from-home shift but potentially exacerbated by the rising crime rates in the area," the report’s authors wrote.