SAN JOSE — A San Jose housing tower with well over 300 units has lurched into a loan default in a fresh and ominous sign of weakness for the multifamily residential market.
The Fay, a 23-story apartment building at the corner of South First Street and East Reed Street in downtown San Jose’s lively and trendy SoFA district, is in default on a $182.5 million construction loan, documents filed on July 1 with the Santa Clara County Recorder’s Office show.
Perched next to Interstate 280 at 10 East Reed St., the 363-unit Fay apartment building is a prominent tower at one of the key gateways to downtown San Jose.
When The Fay formally opened its doors with much fanfare in December 2024, the building’s owners and San Jose officials expressed the hope that the tower’s hundreds of tenants would help inject additional vibrancy into the city’s downtown.
To be sure, the tower’s residents can still fulfill that role. The loan default, however, raises the specter that a new owner could wind up with the apartment building.
Why? The lender might seek to foreclose the loan and put the property up for auction or seize the tower to satisfy the loan delinquency.
In 2020, the property’s owner, an affiliate of residential developer Scape, bought the development site, paying $16.5 million for the parcel.
In 2021, Scape, an England-based real estate firm, obtained a loan from a Madison Realty Capital affiliate to finance construction of the residential tower, county records show. Murro, a Scape brand, developed the tower.
In late 2024, the building was completed, and residents began moving into The Fay, whose upper floors command spectacular views of San Jose and the Santa Clara Valley.
The official notice of default filing stated that the Scape affiliate owed $189.9 million as of June 30. In loan default cases, interest, late fees and penalties could cause the amount owed to exceed the amount of the original financing.
The loan default is a reminder that economic maladies continue to afflict the Bay Area’s apartment, office, hotel and retail sectors to varying degrees, even as the end of the coronavirus outbreak and its disruptions recede into the past.
Apartment property loan defaults and foreclosures have become particularly acute in the East Bay. Lenders have seized multiple apartment buildings to satisfy delinquent loans.
The struggles of the apartment market could lead to fading values for these types of properties, a problem that haunts other segments of the commercial real estate market, such as office buildings and hotels.
The effects of slumping property values extend beyond the owners of real estate. Property value trends can imperil revenue for an array of public agencies.
If real estate values turn soft in a region, the decline could impede a crucial revenue stream for cities, counties, regional agencies and school districts.