San Francisco's largest hotel, which is also one of the country's largest hotels outside of Las Vegas, the Hilton San Francisco Union Square, is headed for auction. And there are some hints that a buyer could convert it into apartment housing.

As San Francisco struggles to regain its tourism traffic and to reestablish itself as a favorite convention destination, it could potentially lose a large chunk of downtown hotel rooms in a major hotel-to-housing conversion. The SF Business Times reports that potential buyers are lining up for the Hilton San Francisco Union Square as well as the nearby Parc 55 hotel, which are up for auction as a package deal. And it could be that there are some disruptors in the mix who would seek to convert one or both properties to apartment housing — though city leaders might have a thing or two to say about such a conversion.

The two hotels were surrendered to their lender in June 2023, in a shocking turn of events that came just a week before the EU-based Westfield corporation made a similar decision to walk away from its downtown mall. In both cases, the owners made the decision to stop making payments on massive loans for properties that were no longer worth what they previously were, in the post-pandemic economy.

Together, the Hilton and the Parc 55 represent nearly 3,000 rooms, or nearly 10% of the city's total hotel stock. But the massive, block-wide Hilton, with its 1,921 rooms, is now "functionally obsolete," as hotel consultant Alan Reay tells the Business Times, unless a major convention is in town.

A bondholder report on the property suggests that business has suffered recently due to the large hotel-worker strike, which has maintained a loud picket-line presence at the Hilton's front entrance — leading to cancellations. And the report doesn't paint a very positive picture for the property even if they concede to union demands for higher wages, saying, "Any significant increases in payroll will likely offset any gains in Occupancy or ADR [average daily rate] the properties might achieve in 2025."

The two hotels are on track for a combined net operating loss of $30 million this year, though they did turn an $8 million profit in 2023.

"I think some of the higher probability buyers are looking to convert hotels to apartments, like is going on with offices to apartments," says Reay, speaking to the Business Times.

The hotels are currently under the receivership of Hotel Asset Value Enhancement, which has until March 31, 2025 to close a deal with a buyer. If they fail to do so, the lender, JPMorgan Chase, will then have until July 15 to foreclose, as the Business Times reports.

A conversion to housing for one or both properties would entail a fair bit of risk and some major approval headaches in SF's notoriously slow bureaucracy.

City leaders — including a new crop of supervisors joining the Board of Supervisors and a new mayor — might not like the idea of losing two or three thousand hotel rooms, especially if the convention market bounces back. However, such big numbers would put a dent in the 82,000 new housing units that the city is on the hook to approve by 2031, under its state-approved Housing Element plan.

Previously: Owner of SF's Largest Hotel, the Hilton Union Square, Is Walking Away, Surrendering It to Lender