PAUL SOLMAN: What some folks consider America's ticking financial time bomb, empty office buildings.

NANCY WALLACE, University of California, Berkeley: Commercial real estate is the big problem across the country, really.

PAUL SOLMAN: Real estate economist Nancy Wallace.

NANCY WALLACE: And, obviously, San Francisco, the problems are really significant.

PAUL SOLMAN: Especially in San Francisco, which The New York Times just called the most empty downtown in America.

How empty are the office buildings?

JESSE BLOUT, Strada Investment Group: About 33, 35 percent vacant.

PAUL SOLMAN: Develop Jesse Blout.

Compared to what?

JESSE BLOUT: Natural vacancy rate is 10 to 15 percent.

PAUL SOLMAN: Which means that the owners: NANCY WALLACE: They are literally not paying their mortgages.

PAUL SOLMAN: Bad enough, but there are also another trillion dollars in mortgages that need to be refinanced this year and next.

And so: NANCY WALLACE: If interest rates don't come down, those mortgages would be nearly impossible to refinance.

And so we're going to see another wave of water called maturity defaults, of people being unable to refinance.

PAUL SOLMAN: And that would wipe out the owners, leaving downtown San Francisco and similar cities more hollowed out, shades of the great financial crash of 2008, and thus investor and depositor fears in San Francisco and in the past few weeks all around the country triggered by losses at New York Community Bank, which announced it will try to reduce its commercial real estate loans.

But, to some folks, like developer Blout, the current crisis in San Francisco at least actually seems like an opportunity.

JESSE BLOUT: We have never seen prices like this.

We started our business after at the start of the Great Recession in 2009-2010.

And that was a historic buying opportunity.

PAUL SOLMAN: This moment even more historic.

So Blout's firm, Strada, which moved into this 18-story building in 2022, bought it a month ago for a song.

JESSE BLOUT: Fully 70 percent discount off of what it was valued just five years ago.

PAUL SOLMAN: OK, a pricey song, $67 million, still, just 30 cents on the dollar.

JESSE BLOUT: San Francisco is still one of the best cities in the country.

It's the center of artificial intelligence.

So there is more office jobs in San Francisco than there ever were.

PAUL SOLMAN: So the office is fairly empty here.

JESSE BLOUT: Yes.

PAUL SOLMAN: And yet I see all that traffic on your bridge.

JESSE BLOUT: It's picked up quite a bit.

We're not unlike most companies in San Francisco these days, where we tend to let people work from home from -- on Mondays and Fridays, and then everybody's here.

If you were here tomorrow, it would be -- you couldn't find a seat.

PAUL SOLMAN: Some see a building half-empty, Blout half-full, and betting on a return to work from work.

Having paid only 30 cents on the dollar, he had money to fill it up.

What are you going to do to get them back?

JESSE BLOUT: We're going to spend some money, a million bucks just for the window washing equipment.

It's all about creating new experiences for the tenants and giving people a reason to come to work.

PAUL SOLMAN: Including a rooftop common area with a view.

JESSE BLOUT: We're going to upgrade all of the pavings and all the railings and everything and put in some beautiful plantings and places to sit.

PAUL SOLMAN: So, Blout thinks he's buying at the bottom of the so-called real estate cycle.

That is, too little office space means soaring rents, prompting a building boom, financed with debt.

Eventually, there's a glut, your tenants skedaddle, especially this time, thanks to COVID.

Your rents can't cover your costs.

NANCY WALLACE: Then you foreclose or you sell your property at a third of its market value, and the cycle starts again.

PAUL SOLMAN: But what happens to those holding the commercial real estate loans, many of them regional banks without much of a capital cushion?

What do they do to keep afloat?

JESSE BLOUT: A lot of them now are working with their borrowers to not take back the keys in the so-called pretend and extend.

PAUL SOLMAN: Pretend and extend.

Pretend that it's worth more than it is, until such time as it comes back.

JESSE BLOUT: And everyone's hoping that rates come down and more people come back to work.

PAUL SOLMAN: And extend is, hey, you can pay us off over a longer period of time, so you don't have to give us back the keys.

JESSE BLOUT: Correct.

PAUL SOLMAN: Now, to be fair, many of San Francisco's office towers are financed by huge banks like Wells Fargo, which can afford bigger losses.

But they too do so-called loan restructuring, AKA pretend and extend.

Ed Obuchowski and Wendy Ross founded and run the community Bank of San Francisco.

So, I asked, is pretend and extend an accurate description?

ED OBUCHOWSKI, Co-Founder, Bank of San Francisco: It is accurate.

And if there's a challenge, I think it's incumbent on both parties to try to work it out.

PAUL SOLMAN: So it's just a question of terminology.

I mean, pretend and extend or?

ED OBUCHOWSKI: Or working collaboratively and taking the long-term view to work out of the loan.

PAUL SOLMAN: Now, their bank makes commercial real estate loans.

So is it in trouble, maybe even headed for collapse like nearby Silicon Valley Bank and First Republic not so long ago?

ED OBUCHOWSKI: It's not had a major impact with us.

PAUL SOLMAN: No, it lends modestly, they say, charges a bit more, pays depositors a bit less.

But you thank your lucky stars that you're not a bank that put money into fancy downtown real estate?

ED OBUCHOWSKI: Sometimes, small is good.

PAUL SOLMAN: Was that your thinking going in, that small is good, in that you wouldn't get stuck with properties that might plummet in value?

WENDY ROSS, Co-Founder, Bank of San Francisco: Our core is community banking, if you will.

And so it's always going to be the type of lending where we have a loan, but also a personal guarantee, and with guarantor support, we can look at the other assets of the person behind the property, if you will.

And that kind of just goes back to the core community banking people.

It's a people business, if you will.

PAUL SOLMAN: Isn't a big problem elsewhere in the country among regional banks that, if the value of what's on their books, the collateral of the commercial real estate, has gone down a lot, that they're not going to be able to lend locally?

ED OBUCHOWSKI: It just has a negative knock-on effect over there, because if they're working through challenges there, it's hard to shift even psychologically from workout mode to new business development mode.

PAUL SOLMAN: Or perhaps even survive.

So much depends, then, on whether workers return to their offices, as Jesse Blout is pretty much demanding three days a week, and, of course, whether interest rates come down.

Fed Chair Jerome Powell is holding off on rate cuts for now.

How worried is he willing to admit he is about commercial loans, Scott Pelley asked him recently on "60 Minutes."

JEROME POWELL, Federal Reserve Chairman: We looked at the larger banks balance sheets, and it appears to be a manageable problem.

There's some smaller and regional banks that have concentrated exposures in these areas that are challenged.

PAUL SOLMAN: But, of course, how can the head of the Fed say there is a crisis or even could be?

OK, you would like a bottom line, right, on Powell's prognosis, Blout's investment, San Francisco, commercial real estate and its lenders?

Well, time will tell has become such a cliche, we can't sign off with it anymore.

But let's face it.

Time will tell, until the next real estate cycle, that is.

Hope to see you then.

Paul Solman for the "PBS NewsHour" back home from San Francisco.