Will the Tech Downturn Be the Death of SF Real Estate?



With increasing layoffs, sky-high interest rates and empty office buildings, the woes of San Francisco’s struggling tech-driven economy make headlines every day.

But, 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 shows that the economic downturn has negatively affected residential property across the city with stagnant sales, falling rents and certain areas bearing the brunt of the decline. But ever-optimistic estate agents say the market may be ready to heat up again.

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Pedestrians pass houses to rent and buy. | Camille Cohen/The Standard

Rents are lower in most SF neighborhoods

Rent prices are falling throughout San Francisco, posting a 1.7% decline in December, more than twice the national rate of decline. And average demand for apartment rentals fell through January 2023, according to the SF comptroller’s office. While it’s typical for rents to drop in the fall and winter before rebounding in the spring and summer, city economists say SF’s recent rent swings reflect how economic challenges continue to affect renter and buyer behavior.

“At the end of 2022, [rent fluctuations] was worse because of concerns about the overall state of the economy, consumer confidence fell and household formation slowed—all of which constrained rental demand more than normal,” said Ted Egan, chief economist at the Comptroller’s Office. “SF fell by more than 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 heightened concerns about crime and drug use — rent prices remain stubbornly below pre-pandemic levels downtown stayed.

“I know a lot of owners who have classic Beaux-Arts buildings that everyone wanted to live in 10 years ago — Lower Nob, Polk Gulch, that area into the Tenderloin,” says Janan New, executive director at the SF Apartment Association. “The quality of life is not as high in those neighborhoods as it used to be, and a lot of people have like a 50% vacancy rate and can’t get tenants to move in.”

Instead, real estate and housing markets in low- and middle-income neighborhoods in southern and western SF have fared better over the past year. For example, the sunset occurred from 2022 with rents that were 101% of 2018 levels – a measure referred to as the Rent Recovery Rate. The Sunset also reported one of the largest year-over-year increases in average rent.

Impact on San Francisco Home Sales

Rent is not the only housing measure affected by the country’s economic downturn; San Francisco home sales lagged after a stunning 2021 market as rising interest rates and rising home prices cooled buyer interest.

The likely cause? Downtown SF’s large inventory of unsold and vacant apartments, which make up the city’s largest share of residential home sales, but in today’s economic environment are the hardest to sell.

Tech’s mass exodus certainly isn’t helping; with approximately 2.4 million square feet of vacated office space in downtown San Francisco, the city’s once busiest region is now almost a ghost town.

The area’s real estate market fared similarly poorly, with home sales falling sharply in the neighborhood.

The median price for two-bedroom flats in the city center has fallen by 19% in the past year, compared to just 4% in the rest of the city. It also takes twice as long to sell an apartment in downtown SF than anywhere else in the city, and the neighborhood’s purchase prices were the lowest since 2017.

On the other hand, single-family home sales are stronger in San Francisco, which shows more demand than in the condo market.

Nearly two-thirds of SF home sales closed over the final asking price in 2022, compared to just 33% of the city’s condo sales. The months of inventory (MSI) – the amount of time it will take to sell all the units on the market – for condos is nearly double that of the city’s housing stock, indicating much stronger demand from buyers for homes.

But for the first time in a decade, SF median home prices fell 1% to $1.78 million between 2021 and 2022.

While the drop isn’t good news for homeowners, experts say falling sales prices, low unemployment and easing inflation may be signs that the worst is over for the Bay Area’s beleaguered real estate market.

“Our economy has been so technology-based, and the ability for that industry to operate more easily than other industries means we’re particularly hard hit here,” New said. “[The SF economy has] kind of just became a one-trick pony for technology, and at the time it was great, and we rode it out. But I’m hoping that there’s a little more diversity in the next growth in our market—and the growth will come, it’s just when is it going to be?”

Ready 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’s hesitation that had houses on the market for months has reportedly dried up. Compass analysts say agents are reporting increased buying and buyer activity compared to the end of 2022.

“In 2023, there is a lot of optimism in the market among agents,” says 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 bit from their highs.”

Indeed, new data suggests that even as technology continues to let go of thousands of employees, people are slowly creeping back to San Francisco. LinkedIn reports that the Bay Area was the second most relocated region in 2022, and data from the US Postal Service shows that the rate of out-migration from the city has slowed significantly from its pandemic peak. And new technological excitement around artificial intelligence could lure people back to the Bay Area, which now serves as the generative tech industry’s financial and intellectual capital.

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Pedestrians walk the streets of Hayes Valley, a central San Francisco district where tech and AI startups have begun to dominate and echo the local culture
“Cerebral Valley.” | Camille Cohen/The Standard

The result? Estate agents and market experts are eager to turn the page on a rough end to 2022, ushering in a new era for the city. Buyers have already 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 putting the pandemic behind us now.”

As optimistic as real estate agents are, it may take more than a surge in buyer interest to dig San Francisco out of its real estate slump.