With mounting layoffs, sky-high interest rates and empty office buildings, the woes of San Francisco’s struggling tech-driven economy make headlines every day.
Yet, as the city’s population shows signs of a comeback, what is the net impact of these opposing trends on the residential real estate market in the city?
The latest data show that the economic downturn has negatively impacted residential real estate across the city with stagnating sales, falling rents and certain areas bearing the brunt of the decline. But ever-optimistic real estate agents say the market may be ready to heat back up.
Rents Are Down in Most SF Neighborhoods
Rent prices are falling throughout San Francisco, recording a 1.7% dip in December, over twice the national rate of decline. And median asking apartment rents continued to drop into January 2023, according to the SF Controller’s Office. Though it’s typical for rents to decline in the fall and winter before recovering in the spring and summer, city economists say SF’s recent rent fluctuations reflect how economic challenges continue to influence renter and buyer behavior.
“In late 2022, [rent fluctuations] were worse because of concerns about the overall state of the economy, consumer confidence dropped and household formation slowed—all of which limited rent demand more than normal,” said Ted Egan, chief economist at the Controller’s Office. “SF dropped by more than the average, but not the worst in the country.”
And in what many say is a continuation of pandemic-era challenges—such as the 2020 exodus of young adults from the city and increased concerns about crime and drug use—rental prices continued to remain stubbornly below pre-pandemic levels in downtown regions.
“I know a lot of owners that have classical Beaux-Arts buildings that, 10 years ago, everybody wanted to live in—Lower Nob, Polk Gulch, that area into the Tenderloin,” said Janan New, executive director at the SF Apartment Association. “The quality of life is not as great in those neighborhoods as it used to be, and a lot of people have like a 50% vacancy factor and can't find tenants to move in.”
Instead, real estate and housing markets in low- and middle-income neighborhoods located in southern and western SF fared better in the last year. The Sunset, for example, emerged from 2022 with rents that were 101% of 2018 levels—a metric referred to as the Rent Recovery Rate. The Sunset also reported one of the greatest year-over-year increases in average rent.
Impact on San Francisco Home Sales
Rents aren’t the only housing measure affected by the nation’s economic downturn; San Francisco’s home sales lagged after an astounding 2021 market, as rising interest rates and soaring home prices cooled buyer interest.
The likely cause? Downtown SF's huge stock of unsold and empty condos, which comprise the city's largest share of residential home sales but in today's economic environment are the most difficult to sell.
Tech's mass exodus certainly does not help; with roughly 2.4 million square feet of vacated office space in Downtown San Francisco, the city’s once-busiest region is now nearly a ghost town.
The area’s real estate market has fared similarly poorly, with home sales dropping precipitously in the neighborhood.
The median price for two-bedroom condos in Downtown dropped 19% over the last year, compared with just 4% across the rest of the city. It also takes twice as long to sell a downtown SF condo than one in any other part of the city, and the neighborhood’s condo sales prices were the lowest seen since 2017.
On the other hand, single-family home sales are stronger in San Francisco, showing more demand than in the condo market.
Nearly two-thirds of SF home sales closed over the final asking price in 2022, compared with just 33% of the city’s condo sales. The months' supply of inventory (MSI)—the amount of time it would take to sell all the units on the market—for condos is nearly double that of the city’s home inventory, indicating much stronger buyer demand for houses.
But for the first time in a decade, SF median home prices dropped by 1% to $1.78 million between 2021 and 2022.
Though the drop is not great news for homeowners, experts say that dropping sales prices, low unemployment and easing inflation could be signs that the worst is over for the Bay Area’s beleaguered real estate market.
“Our economy was so tech-based, and the ability for that industry to work remotely easier than other industries means that we're particularly hit hard here,” New said. “[The SF economy has] kind of just become a one-trick pony for tech, and at the time it was great, and we rode it out. But I'm hoping that there's some more diversity in the next growth in our market—and the growth will come, it's just when is that going to be?”
Poised for a Comeback?
Some local real estate agents and market experts say that, anecdotally, it feels like residential real estate in the city is starting to bounce back from its post-pandemic slump.
All the buyer hesitation that had homes sitting on the market for months has, allegedly, dried up. Compass analysts say that agents are reporting increased shopper and buyer activity compared to the end of 2022.
“In 2023, there's a lot of optimism in the market amongst agents,” said Kevin Patsel, Compass’ regional vice president for Northern California. “People are moving, buyers are coming out of the woodwork, and they're ready to buy now that interest rates are down a little bit from their highs.”
Indeed, new data indicates that even as tech continues to let go of thousands of employees, people are slowly creeping back into San Francisco. LinkedIn reports that the Bay Area was the second most moved-to region in 2022, and U.S. Postal Service data shows that the pace of outmigration from the city has slowed considerably from its pandemic peak. And new tech excitement surrounding artificial intelligence may lure folks back to the Bay, which now serves as the generative tech industry’s financial and intellectual capital.
"Cerebral Valley." | Camille Cohen/The Standard | Source: Camille Cohen/The Standard
The result? Real estate agents and market experts are eager to turn the page on a rough end of 2022, ushering in a new era for the city. Already, buyers have closed on the city’s most expensive home at 3450 Washington St., a rare sale at an off-peak time of year.
“In some ways, I feel like this is a whole renaissance for San Francisco,” Patsel said. “People are coming back and reprioritizing, and it's almost like we're leaving the pandemic behind us now.”
However optimistic real estate agents may be, it may take more than a surge in buyer interest to dig San Francisco out of its real estate slump.