This is CBS. I am the world. I'm John Bachelors. The recovered from the pandemic, work from home, and what appears to be an out of control crime and homelessness problem in major American cities.

San Francisco repeatedly is in the news for all of those problems. Right now we have fresh news that the 1921 room, Hilden San Francisco Union Square and the 1,024 room, Park 55 in San Francisco are closing near enough. Why? Business. I welcome Chris Regal, the CEO of Scholar.com, a global technology firm,

transforming the retail space with digital signage. This is the Scholar Report. Chris, you've been traveling during the pandemic to San Francisco now and again. I recall an anecdote you told of looking out of your hotel room. I believe you were in San Jose outside of Urban San Francisco, but certainly integrated in the Silicon Valley, seeing empty parking lots. Those empty parking lots, those work from home workers. Are they enough to explain the exit from San Francisco?

The exit from San Francisco of the Hilden and Park hotels. Good evening to you Chris. Good evening John, not to their base in that those workers working from home have certainly impacted the San Francisco economy. Probably the largest single factor is the crime.

From attending several conventions in San Francisco in the last two to three years, seeing the decay in the city that you see from the waste and abuse on the streets, the crime impacting retailers in San Francisco, the decline in tourism, the decline in convention business. This is kind of a very, very nasty spiral of if people do not feel safe in the city, people stop going to the city.

And then that has the impact of making large hotels like these two as discussed no no longer financially viable. So you're in that do loops scenario, but this is most likely triggered by the crime and the chaos on the streets as opposed to work from home.

Here to for we've been talking about retail space closing on the street level storefronts or big shopping centers Nordstrom.

These are major hotel systems of more than 2000 rooms between them. That's convention business. Isn't it or is it convention and tourist business, meaning that it isn't just the shoppers who live in the neighborhood anymore. It's people traveling this ember. Cisco. Have I interpreted that correctly Chris?

No, you've interpreted perfectly pre pandemic San Francisco had like a mid 80s to upper 80s occupancy rate in hotels. When you think of all the tech companies in the Bay Area, Apple, Facebook, Google, etc. San Francisco could flourish on tech conferences alone in keeping those hotel rooms full in the pandemic.

So many of those events one virtual now because of some of the crime issues in the city, many of those events are going to other locations. So it becomes that point of the city as part of an ecosystem is a great draws a beautiful city with good dining and great attractions and conventions to drive people in.

Now is that convention businesses fragmented as the city is not as safe as a retail is declining. You have a problem that there's no one simple fix for.

Problems in San Francisco, some of them are unique to the positioning of the city right next to the richest people in the solar system. However, the overall problem we can find in other cities, especially established veteran city Chicago Philadelphia, New York, Boston, certainly Los Angeles.

We need a technical explanation. Chris has helped me understand an interest only mortgage of the the companies responsible for these hotels and office towers say in Philadelphia have committed a great deal to the paying of the interest only over us a fine

period of time 10 years or 15 years and at the end the balances do they're now walking away. Does that turning the keys over to the lender and walking away. Does that leave them with an obligation or is it all now in the hands of the banks.

So in many cases in these commercial loans, you have our non-recourse loans. So as the economic climate provides more headwinds, whether in the hotel or office industry, these owners are simply saying, hey, this property is no longer viable. They hand the keys back to the bank and kind of walk away, Scott free.

The banks are then settled or saddled with properties that may be worth 50, 60, 70% less than the debt that is attached to those buildings. So you're in an economic cycle there where you'll have major evaluations down in San Francisco. It's noted on these properties that may be worth 60 to 70% less than the money that's owed against them now.

So you have a problem that initially is a banking problem because banks are going to take huge write downs on the values of these loans. Secondarily, at the municipal side because cities and counties collect property taxes on buildings. Those property tax valuations will go down 50, 60, 70% as well. And there'll be a pinch in one, two, three years on municipal government budgets because of the shortfall of funds as the property values to come.

They will see a general reporting in these last days that the sum total of interest only buildings coming due over the next three years is $1.5 trillion.

I do not believe our system has expected that scale coming its way. So let's connect it to what can rescue some of these buildings and some of these hotels. Work from home.

How much of this in your thinking Chris because you're an employer as well as a traveler. How much of this is work from home and most shake it off.

As we get farther away from the pandemic and all of the controversies of vaccine. Can we return to 70, 80, 90% occupancy of the towers.

John, I think they'll see kind of a reset in the amount of commercial office spaces that's required. So some industries will allow for work from home.

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