SAN FRANCISCO — The owners of the fourth-tallest office tower here – one of whom is Donald Trump – want more time to pay back their loans.

The 52-story carnelian building, 555 California Street, is about 93% leased. But many tenants – which include banks like Morgan Stanley and firms like Kirkland & Ellis – will be up for renewal soon in a city where workers have been slow to return to the office. Co-owners Vornado Realty Trust and the Trump Organization have requested more time to pay back the $1.2 billion loan used to purchase the building, according to loan servicer documents.

Like other commercial landlords and lenders in downtowns across the country, 555 California is staring down a major pandemic downturn in the commercial real estate market. Economists warn the situation could portend disaster, risking parts of the banking system, too.

“It’s scary,” said a finance worker based out of 555 California, regarding plummeting office building valuations in the area. In the more than 20 years she has worked in the building, the woman – who spoke on the condition of anonymity because her employer doesn’t allow staff to comment publicly – said she has never seen it so empty.

Since the pandemic, employers – particularly in major cities – have been struggling to get their workers to return to the office, while others have given up and allowed workers to go fully remote. That trend is finally starting to catch up with the owners of office buildings in the form of rising vacancy rates and declining property values.

Earlier this month, real estate data provider Trepp reported that an estimated $270 billion in commercial bank loans are coming due in 2023 – and warned of the potential for defaults. Office delinquencies spiked in May, signaling a “tipping point,” according to Manus Clancy, senior managing director at Trepp.

Asked about commercial real estate concerns in a television appearance on Wednesday, Treasury Secretary Janet L. Yellen said she thinks banks are “broadly preparing for some restructuring and difficulties going ahead.”

In San Francisco, the poster child for the crises facing downtowns, the owner of a Hilton hotel in Union Square blamed vacant offices and a slow return to work for its decision to stop paying its $725 million loan last week. The property, the largest hotel in the city, will be returned to JPMorgan Chase, which bought the Bay Area’s failed First Republic Bank last month.

And on Monday, the San Francisco Chronicle reported that Westfield stopped paying the mortgage on its downtown San Francisco mall and plans to hand the property back to lenders. The news follows Nordstrom’s decision to move out of the once-popular mall just blocks from Union Square.

“If office and retail owners are having trouble generating rental income because people just aren’t going into the office and shopping, then it increases the odds that they aren’t going to be able to pay back those loans in a timely way,” said Mark Zandi, chief economist for Moody’s Analytics. “That means losses will start to mount on those loans. And because the banking and financial system more broadly is already struggling with lots of other problems . . . there’s going to be more banking failures.”

Despite the public debate over return-to-office mandates at significant companies, experts say office occupancy will never return to the levels experienced before 2020. In February, workplace data company Kastle Systems estimated that half of the workers in the United States had returned, but that figure has stagnated since.

That means companies facing economic headwinds such as inflation and high-interest rates don’t need to pay for the same amount of space in cities around the country.

Amazon has pulled back on developing major real estate projects – including its second headquarters known as HQ2 – in Virginia and Tennessee. Google pressed pause on plans to build an 80-acre campus in San Jose – the heart of Silicon Valley.

Comcast, one of the biggest employers in Philadelphia, is pulling out of some office buildings there. Brookfield, a major office building landlord in Los Angeles, has defaulted on more than $1 billion of commercial real estate loans in recent months, according to Bloomberg.

And in D.C., where real estate firm CBRE reports office vacancy has continued to increase to about 20%, some landlords struggling to find tenants are feeling “desperate.”

Brookfield spokeswoman Kerrie McHugh Hayes said in a statement that there is still demand for the landlord’s top-tier office space. “While the pandemic has posed challenges to traditional offices in certain U.S. markets, this represents a very small percentage of our portfolio,” she said.

“We’re always evaluating space plans to make sure they fit our business needs and to create a great experience for employees,” said Amazon vice president of global real estate and facilities John Schoettler. As Amazon embraces hybrid work, Schoettler said the company is committed to its projects in Virginia and is evaluating plans in Nashville as it continues “learning how these new habits may impact our office footprint.”

Regarding Google’s San Jose campus, spokesman Ryan Lamont said, “As we’ve stated, we’re working to ensure our real estate investments match the future needs of our hybrid workforce, our business, and our communities,” adding that the company is still committed to the city.

Comcast said it is subleasing the building in Philadelphia to bring employees together in a Comcast-owned space. The company relies on in-person collaboration, added spokesman John Demming said.

(Amazon founder and former CEO Jeff Bezos owns The Washington Post.)

Still, many experts say the worst can still be avoided. The issues have been known for a while, giving lenders plenty of time to consider what to do.

Banks can always renegotiate the terms of their loans to landlords. The owners of 555 California Street have requested an extension on their loan, according to their loan servicer’s March 9 note, as permitted via a commonly used clause in their contract. It’s part of a financial strategy cheekily called “extend and pretend,” which allows lenders to spread out the consequences of defaulted loans over several years.

Vornado and the Trump Organization’s loan servicer, Midland Loan Services, declined to comment. The Trump Organization did not respond to requests for comment.

Although cities themselves could be in trouble because of property taxes and budget shortfalls, the financial system as a whole is more protected, said Brookings Institution fellow Tracy Hadden Loh, who researches real estate and cities.

“It’s in no one’s interest to have them all fall into foreclosure at once because that could destabilize the banking system,” she said. “So banks will take what they can get in terms of payment and work through this. Everyone is going to be doing everything in their power to prevent that from happening.”

Few cities have attracted as much attention over ongoing distress as San Francisco.

Rachel Leamy, who has run three shoeshine stands here called the Shoeshine Guild for more than 20 years, said she’s been through many booms and busts – including the tech bubble of the early 2000s and the 2008 financial crisis.

But now, “it’s a damn ghost town,” said Leamy, who shines shoes on the ground-level concourse of 555 California Street.

Typically, it’s a pretty stable business. “People need shoe shines when they’re flush, or if they need a pick-me-up, or if they’re looking for work,” she said.

She said she’s doing maybe half the business she was before the pandemic, and her family is still relying on food stamps to get by.

“I always wondered what would make this business obsolete,” she said.

In the city’s financial district, many restaurants and stores are shuttered and boarded over, as office vacancies hover around 30%, according to CBRE. Last month, just down the block from 555 California Street, the office tower at 350 California reportedly sold for $60 million – an 80% decrease from the price it sold for just four years ago, according to The Wall Street Journal.

The reported seller, Mitsubishi’s MUFG Americas group, did not respond to a request for comment, nor did SKS Partners, the group that bought the building, according to the San Francisco Business Times.

Stalwarts of the downtown retail scene including Old Navy and Cole Hardware are closing their doors. And even businesses that opened flagship storefronts after the pandemic subsided, such as high-end furniture store Coco Republic, have announced closures.

San Francisco is uniquely vulnerable given the large percentage of the population that works in tech or other industries well-suited to remote work and a long-festering homelessness issue the city has failed to resolve.

Banking failures have recently put an additional unwanted spotlight on the city, where offices downtown still bear the name of the newly distressed Silicon Valley and First Republic banks.

Jay Bechtel acquired real estate for Google for 20 years before leaving the company in March. He said he’s worried about San Francisco’s ability to attract workers back and what the consequences of that could be.

“If you have a building that is not fully occupied, rents are either dropping or nonexistent because it’s empty and you have no demand. That’s not a good combination if you’re a landlord,” he said. “That will reduce the building’s value – who’s going to want to buy a building with a vacancy and low rents?”

In hopes of avoiding a domino-effect financial crisis, Bechtel said he hopes lenders will be willing to renegotiate with landlords rather than take over the buildings. “Most of them aren’t set up to be landlords or real estate owners – they’re banks or insurance companies,” he said.

If commercial landlords are forced to hand over the keys to their lenders, “you’re going to have a lot of distressed sales,” Bechtel said. “They’re going to be selling for cents on the dollar because . . . that’s not their core business. So, hopefully, the lenders will understand the situation that their landlords are in and rework their terms.”

San Francisco still has several top-tier office buildings – think big windows, natural light, green space, and fancy amenities – that are attracting tenants, said Robert Sammons, a researcher for commercial real estate brokerage Cushman & Wakefield. But it also has a substantial number of “obsolete” buildings – think fluorescent lights, cubicles, and no air conditioning – that he thinks will probably have to be torn down.

“Before the pandemic, we had the lowest vacancy rate of any city in the country,” Sammons said. The rate was 6%, according to data from the city of San Francisco.

“The market was incredibly tight across the board,” he said. “But now the workplace has shifted, and it’s shifted more than likely permanently.”

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