SF Housing Market Left For Dead Roars Back Unexpectedly; 5 Takeaways

In 2023, San Francisco was an absolute basket case – having fallen from the coolest place on earth pre-COVID to a largely vacant, crime-ridden hellhole.

1. COVID work-from-home policies left the City practically vacant, as the City’s tech workers could most easily work from home.
2. Mass tech layoffs in 2022 and 2023 wiped out even more of the City’s workforce.
3. The City’s commercial real estate sector saw a record-high vacancy rate of 37%, and trophy buildings fell into disrepair and foreclosure.
   1. A 22-story office tower (350 Cal. St.) fell from a pre-pandemic value of $300 million to only $60 million.
   2. The Westfield Mall on Market Street fell from a $1.2+ billion value in 2016 to only $220 million, as it had become a near ghost town.
4. Crime, drugs, and homelessness drove people from the City and kept them away (count me as one of them).

It was both depressing and awful – and nobody saw it coming back.

But – it is coming back, and then some – for reasons nobody foresaw.

1. SF elected a new mayor who actually enforces laws – and crime has dropped dramatically.
   1. Car break-ins are at a 22-year low; Traffic deaths are down 42%; Homicide numbers are at 1954 levels; The jails are the fullest they’ve been in decades; And the homeless are moving to shelters.
2. Artificial Intelligence came to town.

Not only have AI firms leased almost 1 million square feet of office space and brought thousands of workers back into the City, but the AI firms have also flooded the Bay Area with cash.

For example, the WSJ reported last night that OpenAI allowed 600 employees to sell a whopping $6.6 billion worth of stock in October.

Bay Area agents have been watching that influx of cash push up high-end home values ever since – catching everyone by surprise, as the “crash bros” had convinced the world that the problems I highlighted above were insurmountable and unsolvable.

5 Takeaways:

1. This is another cost of waiting. A savvy Berkeley agent reminded me of this, as he has had clients over the years waiting for prices to soften before buying because of what they were reading on social media. But prices often fail to soften in the Bay Area because of IPOs and stock option vesting. IPOs by Google, Facebook, Twitter, Uber, Lyft, Airbnb, Slack, Pinterest, and Zoom have all influenced the Bay Area market… while buyers waited for prices to soften (not so much).And now that AI is here, the agent is encouraging his clients to buy now before additional AI cash pushes prices up further. But the broader point is that “waiting to buy” often does not work out in the way that buyers expect.
2. Areas left for dead often come back. I mentioned above that nobody saw San Francisco itself or its real estate market coming back. I should, however, have said “almost” nobody, as savvy and wealthy investors seem never to lose faith – which is why they get so wealthy. IKEA, for example, spent $200 million on a building during the height of the pandemic. Similarly, I watched wealthy investors snap up large swaths of residential real estate after the 2008 meltdown – when most Americans seemed to think housing would never come back.
3. Nobody can predict anything. This is something I repeat over and over in my blogs, as “experts” miss the mark constantly. Recent examples include predictions that the U.S. dollar would collapse (it’s still going strong), that inflation would be transitory (not so much), that we’d see a major recession in 2023, that rate increases would crush the real estate market, that tariffs would cause inflation, and that San Francisco was in irreparable condition.
4. World-ending crises never seem to end the world. This is related to the above, but it is worth reminding ourselves again that the media’s doom and gloom predictions never seem to result in nearly as much doom and gloom as predicted. We came roaring out of the 1987 stock market crash, the late-1980s S&L crisis, the Asian financial crisis of the late 1990s, the dot-com crash of 2000, the 2008 financial crisis, COVID, and more.Point: The U.S. economy is far more resilient than we realize.

   “But Jay, our economy is not resilient, as the Fed and the government were forced to step in and bail out the economy.” Their interventions made things worse – but that is a topic for another blog.

   We’re still supposed to see a private credit crisis, a commercial real estate crisis, an energy crisis, high inflation, and a residential real estate meltdown, as new buyer demand is at a record low. But who cares? We could see corrections, yes, but none will end the world – and opportunities still abound.

5. Please don’t time the market. If the numbers pencil or if you just want a property… buy it. Renowned commercial real estate investor, Ken McElroy, implores his followers not to wait for the bottom of the multi-family real estate market because there is no way to know when we’ll see the bottom. He’s been in the market for bargains for over a year now and is snapping up every property he can – when the numbers work.