SF commercial real estate genuinely feels like it's a slow-motion trainwreck that nobody can stop. As leases end, there's just no way that owners will be able to re-rent those buildings at anything close to the same price.
That seems like it's going to have two major consequences - when the values on those buildings fall, SF is going to lose a lot if income at a time when the quality of life is already greatly suffering there. On top of that, a lot of those buildings have large loans against them that may well become greater than the value of the buildings. The latter certainly feels like the sort of thing that could ripple through the economy as building owners have to sell off assets to make loan payments.
It does seem likely there's more to come, and what if anything can be done to mitigate the impact on the city's economy is an interesting question. Reasoning about that probably requires some careful disentangling of the different inputs - housing policy, remote work trends, recession and tech layoffs, etc.
It's too bad this piece just takes the opportunity to launch into a list of generic conservative complaints about SF policy, which were equally applicable when rents were skyrocketing. They seem to have forgotten that it was all supposed to be Chesa Boudin's fault... Bring him back, he was better for the office market!
Going by the StrongTowns archives, what will happen when these properties go underwater is the rent will be held the same and the building will be vacant. Writ across the entire office space of San Francisco, the result will be a disappearance of foot traffic and empty districts.
Reason being the property financing is a function of market rent. Short term balloon mortgages are commonly used. If the rent for the space falls, when it comes time to refinance, you won’t be able to get a loan to cover your previous balloon payment, making you insolvent. Solution: never lower the rent, even if it means leaving the building vacant. Slowly bleeding is better than instantaneous bankruptcy.
Who is making these loans? Do they know something we don't? Or do they just think that they'll be bailed out when it all goes bust?
Last time the banks were selling the loans to other people. Is that happening again this time? This can't-lower-the-rent phenomenon is well documented at this point so I'm just having trouble figuring out why anyone with money is willing to continue taking on the large risk with limited upside (the value of the buildings).
There’s no “truth” to what a property is worth. It’s worth what the market will pay for it.
But regardless of that, whether the values were inflated because of a market flush with cash or not, it doesn’t change the fact that crashes can and do have ripple effects.
If you purchase an investment asset at a certain price with the expectation of earning a specific future cash flow on it, and your cash-flow target misses, you can absolutely say in retrospect that your investment wasn't worth what you paid for it. If you buy an ice cream cone, and it turns out to taste bad, you can say the ice cream cone wasn't worth what you paid for it.
People miscalculate a product's worth all the time. The "It’s worth what the market will pay for it" mantra is quasi-economic nonsense. It isn't true.
Yes, hindsight changes perception of past decisions. But there is no "end" to the economy. It ebbs and flows. Maybe today this is "worth" 75% less, but what if next year at this time it's "worth" 25% more? Now suddenly it was "worth" even more than you originally paid for it. This it the problem with how you're defining worth: it's going to change depending on when you, in the future, decide to ultimately sell it.
But that's not a particularly useful definition of worth. Worth measures a moment in time. We can only price something based on what we know about it today and what we predict about it in the future, and we're not perfect predictors of the future.
I think about "worth" using the only definition of worth that is particularly helpful (to me): the amount you could get for the asset if you were to sell it now. Part of that decision almost certainly a prediction of what you believe an asset will be worth in whatever time horizon you plan to sell it. You may be right or wrong about that prediction. But it doesn't change that in the moment at which your purchased the asset, it was "worth" that to you/the market. The reality is that many, many people were under the perception that the value of these assets would continue to appreciate as they were all collectively willing to pay what we now believe to be high prices for them.
In hindsight, we may all have been wrong. But in that moment, I could absolutely have sold the asset for the price I paid to purchase it. So it certainly was "worth" that when the transaction happened.
> So it certainly was "worth" that when the transaction happened.
Right, but it's also fair to say that in retrospect that the "worth" at the time of the transaction was incorrect since it was based on an estimated prediction of the future (as you said), which ended up being wrong.
>But that's not a particularly useful definition of worth.
It is a more useful definition than the one you made up. The error in your argument here is that you are mistakenly conflating the words "worth" and "price". These have different meanings. Price is an objective measure at a specific moment in time. Worth is not.
If you choose to use your own personal definition of a word, then you can not have a good-faith discussion with other people who are applying that word's common usage. "Worth" is not the same thing as "price", not even in the field of economics. You just made that up.
You're right, I was loose with my words here. Worth does have a specific economic definition, but that definition is not particularly helpful when talking about an asset price like this. It is by definition individual, can only be known once the future happens, and it depends on when the realization of that value ends. This is particularly challenging when the realization of value (rent payments) on the asset (commercial real estate) is inherently volatile itself. In fact, for this very reason, economic value is generally not (usefully) measurable. So in absence of that, buyers will attempt to estimate the future value, and use that as input to the price they're willing to pay.
My point in my original comment, which I believe still holds, is that there is no objective truth to this number. Multiple buyers can arrive at different definitions of worth depending on how they used the asset and when they ultimately sold it. And even if they both arrived at the same value, it can only be known in hindsight. For example, say I purchase a stock solely as a monetary investment for $10 today, in 1 year the price drops to $2, and in two years the price jumps to $50. The answer to whether the stock was "worth" what I paid depends on when I decided to sell it. If I had to sell that stock in a year to buy a house, it certainly was not. If I could hold the asset for 2 years, it was certainly worth it (and then some). Or, going back to your example before, if the cash flow was less than I expected - that's not great. But next year it could be more than I expected. The time horizon is a critical component here, as are the factors unique to the individual buyer.
Your statement that the property was not worth that much can only be said with the benefit of knowing what the market is today. In 6 months, the asset may be worth 25% more than was paid for it. It's likely that's not the case, but clearly many people thought it was likely the asset would generate more money than it did when it was bought and were wrong. We may also be wrong today.
So, when we're talking about the "worth" at the market level we almost have to be talking about willingness to pay. We assume that will price in estimated future value. There's not much else we can usefully measure here.
> “It’s worth what the market will pay for it”
Is absolutely true at the time it sells — it was worth that much for the former owner who now has that much cash from it. The bigger question is whether the next owner will get that much value from it. Sometimes there is no bigger sucker.
False. Suppose I possess a fungible asset, and that asset is selling on the market at a particular price. I can choose not to sell at that price, because it's worth more to me personally than the market price. Worth is subjective, price is not.
Where people usually err is saying "this property is worth so much more than what people are willing to pay me for it." Or some variation of that statement.
Commercial Real Estate is valued based on Cashflow/Income (correct me if I am wrong). San Francisco should look at examples like One AT&T in STL, which was once worth 400 million that got sold for 4 million or so a year ago.
>There’s no “truth” to what a property is worth. It’s worth what the market will pay for it.
There are historical charts and indexes that compare the price of square foot to inflation, wages, etc. There may be no one single universal truth, but there is a baseline for what real estate should cost (relative to everything else).
My only hope is that because leases aren't all going to come due at once, there won't be a total collapse because everyone's simultaneously selling at fire-sale prices.
SF is going to lose a lot if income at a time when the quality of life is already greatly suffering there
In the boom decades many American city governments have become incredibly, grotesquely inefficient. Voters should now prioritize basic competence over ideological purity so that they can get on a better footing.
SF is particularly tough for this - they've built up so much structural inertia in their government that even if you get someone who's incredibly competent, they're still wildly unlikely to get anything done. I actually think pretty Breed is a pretty good choice for the job, but I have no faith whatsoever in her ability to create meaningful change because of the system she's working in.
It’s bad but ironically prop 13 (which I personally think is a problem) is actually helping SF here because it never had that money to begin with. Of course a smart city would bank all the profit into an emergency fund and so prop 13 would be net negative (I think California generally has done this as a state but not sure about SF).
The statistic I read is about 50% of commercial buildings would have an impact on SF’s budget (ie they would drop below their initial purchase price).
As for the rippling out into the banking sector, it’s plausible because it’s not just SF that’s a problem. All major cities are likely affected by this phenomenon. Cities would have to start regulating employees to go into work but I think that would be politically challenging for any politicians who attempt that.
> It’s bad but ironically prop 13 (which I personally think is a problem) is actually helping SF here because it never had that money to begin with
Its not actually helping, its just changing the route that the impact from the problem takes to hit city revenues. What Prop 13 does to revenues (both the very low nominal rate limit and the assessment increase limit, though people always talk about the second and ignore the first) means that San Francisco relies on other revenue streams than property taxes, such as income abd sales taxes (local and formulaic distribution of state revenues) but these streams respond to the same broad forces (and often with much higher volatility.)
The loans against these buildings are my biggest concern here - these building owners may be about to default en-masse at a time when loan holdings are a big vulnerability to banks. That may have some weird systemic consequences like it did with housing.
The city governments of SF and NY (which seem to have the biggest problems here) have honestly just gotten too big and will need to deal with the pain. The people living in the cities will survive, and honestly may have better quality of life when rent gets cheaper.
A financial YouTube blogger that I watch (hedge fund manager, a university professor and a former investment banker - https://www.youtube.com/@PBoyle/featured ). He seems to have the credentials ( https://www.kcl.ac.uk/people/patrick-boyle ) and his videos are straight forward and accessible and not trying to sell you anything (other than the clearly identified paid sponsorship).
End CA Prop 13 benefits for businesses or make them pay all the difference in back taxes when they sell the property. That would have the potential to massively help the budget and make things more fair for newer businesses moving in, so they wouldn’t be stuck trying to compete with businesses that enjoy a tax bill that at might be 1/20th of theirs.
They responded to that in the article. If you live in San Francisco you should contact the board of supervisors and give them the quote from within the article that permit fees and other costs put the conversion costs well over what the owner could recover.
With the article's $1000/sqft conversion cost estimate, the developer could provide free catered meals for life instead of adding kitchen space to each unit.
Some of that cost isn't really waiveable. Commercial spaces aren't residential spaces. For instance, I've heard that commercial buildings generally run the pipes only up the middle of the building, since they can centralize bathrooms and kitchens. Residential space is not generally so amenable. Residential spaces need other heating setups. Residential spaces have different load characteristics based on where the furniture goes. There's a lot of real differences between commercial and residential buildings, and just like with computer code, as you scale up the building minor differences a single-family home owner would ignore become significant differences become vast differences.
In theory you could go all Mad Max and give them permissions to just start throwing up walls, creating spaces with communal bathrooms, and just dealing with it, but the amount of regulatory work to do that is pretty substantial. Even if you could get the agencies to agree to it in principle, a massively uphill battle since you're basically asking them "Hey, will you agree that you and your mission are worthless and irrelevant inside my building and pretty please promise to not worry about whether other people will start asking questions about what exactly it is you do (including the legislative bodies that provide your budget) and why it is they have to conform but I don't?", they'd immediately start putting their fingers back in the pie anyhow.
It really isn't financially feasible. HVAC is different. Electrical loads are different. Plumbing is different. Sewer is different. Requirements for elevators are different. Life safety is different. Huge chunks of the building would be unlivable because they'd be on the interior with no windows.
To meet even the barest of code requirements you'd basically have to gut the building and redo almost all of it. And SF requirements are hilariously strict and complicated.
Of course it can be done, but if you think renting to businesses is hard, try renting at >$75/sq. ft. A 1200 sq. ft. apartment would be $7500/mo. The only people who can afford that are high-paid technology guys, and their job has already left SF for Texas or wherever.
"To meet even the barest of code requirements you'd basically have to gut the building and redo almost all of it. And SF requirements are hilariously strict and complicated"
The guy who turned the DNA Lounge from a Bar into a Bar has a tragicomic blog detailing the journey.
If he weren't a Mozilla multimillionaire it would have been ludicrous to even try.
Almost all of the cost isn't waiveable unless they are willing to hand out huge subidies to redo everything about those buildings in addition to going "mad max" as you eloquently put it. That would be politically untenable, since it would be seen as a "subsidy for the rich."
If I was to nitpick, I would only say that load is unlikely to be a problem: walls are usually configurable in office spaces, and floors should be able to handle stuffing a data centre in the middle as well.
It depends on the building. A three story brick & concrete building may be able to handle a data center on the top floor. As you get into the 80 floor skyscrapers you're getting into buildings where you have to start worrying about exactly how they wave in the wind, something I don't tend to think about at all. Trying to stick a datacenter on the 75th floor there may be a noticeably bad idea. Scale isn't just an issue for programmers.
Definitely the right solution in my book, but conversions are going to take a lot of time both from the side of government regulation changing to allow it and just in terms of the physical construction work needed.
"a lot of those buildings have large loans against them that may well become greater than the value of the buildings"
You can drop the "may well". They are, right now, full stop. Massively underwater.
The so-called "Harvard Business School types" always advocate for businesses to take on a lot of debt to get that sweet sweet leverage, and a lot of real estate has been mortgaged for a long time. That's not really new.
But prolonged zero-percent interest rates made it both extremely appealing by making it seem like there was no downside: Don't get enough rents? It's OK, you can always roll over your debt for virtually free and try again later. 0% interest is deceptively close to real money if you get too far into "Harvard Business School" analysis and detach from reality too much... but it isn't real money. Enough people made this analysis that prices pushed up in the commercial space just like residential; in theory, at super low interest rates the value of the buildings would converge on the rents being able to cover only the interest, because someone would bid them higher until they reach that point. Don't have to worry about principal, can always roll that over.
But they don't get fixed-rate 30-year-mortgages in that space. Honestly, nobody does except homeowners in the United States. When the interest rates finally go up, you can't even come close to covering the interest on those rents. The cascade of all of that happening to the entire market at once is pretty severe.
So in this scenario, the businesses owning these buildings go bankrupt pretty quickly once rent has to come down at all. But that's not the real problem. Those businesses dissolve, but somebody else acquires the assets generally. The problem is that when they dissolve, they take their mortgage payments with them. Now the mortgage the bank is holding is worthless. They get to repossess a building in a rapidly deflating market. They are not particularly excited about this. As a result, the bonds for this sort of asset get marked down even more.
Fortunately, the American banking system is strong, sound, resilient, and well-capitalized, I am reliably assured. So it's not a problem that the $2.9 trillion in commercial real estate loans the banking system holds as of May 10th [1] are looking at pretty significant haircuts and massive loss of collateral. (Not necessarily as bad as SF, being the biggest bubble it'll see some of the biggest drops, but definitely large double-digit percentage drops are going to be the norm across the board.) The banks are doing strongly and soundly in all their other metrics so they'll be able to handle this just fine.
The “banking system” is an anachronism. We now have a machinery for securitizing asset backed loans. People and companies that just want somewhere safe to store their cash should not be implicitly investing in commercial real estate.
Banking should be a boring industry that charges a cost of carry for storing and transferring cash. No lending, no fiscal assets.
Those poor landlords shouldn't have made risky investments. Thoughts and prayers.
It also sounds like there's a lot more value saved by not having an office downtown with more money to be spend on QoL improvements than renting office space
The problem isn't the effect on the landlords - it's the effect on everybody else.
> more money to be spend on QoL improvements than renting office space
Who is going to spend money on QoL improvements? The corporations who would've spent it on office space will keep it as profits, not invest it in the city of San Francisco. The city will have much less money to spend on QoL because of greatly diminished tax revenue.
Assuming somehow spending money on rent is a more efficient allocation of resources than profits is absurd. For us without an office we're able to hire several more team members and embrace fully remote with east and west coast staff allowing us to expand our service coverage an additional 3 hours without having to ask team members to work outside of normal hours
I know it's only tangentially related, but Hudson Pacific is the largest commercial REIT for the San Francisco (and LA) area. They're down 80% on the year and still falling.
So, I don't find the 75% devaluation figure to be entirely unreasonable.
The benefits off attracting investor money have decreased while costs have steadily increased as San Francisco continued to legislate ways of capitalizing on them. Why?
(To pick apart the investor half of that sentence)
Investors must no longer than
See the benefit of San Francisco. Why?
This is the real question. Tech companies simply follow the money. Investors believed in San Francisco, so tech companies followed suit. Something must have changed the outlook of Angel investors in San Francisco.
Maybe the interest rate combined with San Francisco's high costs, together with lingering remote-centric investor workflows, have caused investors to seek a new center for tech and investment that isn't so costly. After all, more of their wealth is being captured by the fed than it used to, and they now can't afford to keep both the fed and the local San Francisco authorities in money. San Francisco's ordinances were written with low interest rate and cheap investor money in mind. Maybe a city with cheaper housing and friendlier board will now get a turn.
I believe that city might be Austin. Texas has always had a good story around cheap housing, and the tech scene is picking up there by several accounts.
San Francisco had momentum, and people wanted to be there because everyone else was there. The pandemic caused a reset. Now investors will converge on a new city, and the decision of which one will now be based on merit instead of momentum.
why do they have to necessarily seek a center at all? Post-Covid, we've met our investors once or twice at a conference in Vegas, everything else was email and zoom. Not being a part of the daily grind like the employees, we really don't care where investors reside anymore.
I don't know much about that, but according to your hypothetical, people who have to put up several or more million dollars of their own money to raise a fund will move to Austin to save ~$500k on housing? to be close to other investors who are eager to save a buck or two in Austin?
Austin isn't exactly a poster child for affordability these days - $1-2M houses are common there, and don't get you much more than in SF or on the Peninsula.
The advantage of Austin is that the suburbs still have reasonably affordable homes (< $500K), while in the Bay Area you're looking at $1M+ even out to the Tri-Valley area. But high housing prices follow money, for pretty basic supply & demand reasons. If a place starts getting widespread prosperity housing prices will eventually catch up.
Austin has high property taxes, which forces growth. You don’t have the same Prop 13 dynamic where people have no reason to sell.
People who suddenly find themselves on property worth millions of dollars will need to sell or redevelop, which helps the housing market function properly in the long run.
Austin will be ruined if this continues, property taxes are through the roof due to assessments that make no sense whatsoever and locals are moving out in droves.
This is what happened with SF and LA in their respective boom times. There's no reason to believe Austin will be an exception. In fact, prop 13 may have seemed like a rational response to the fact that property values were going up at breakneck speed and forcing locals out.
What I find fascinating is that it took so long for this to become reality:
Originally, office space was needed for secretaries, typewriters, meeting rooms, desk telephones that were hooked up to a central company number. Eventually office buildings were needed for mainframes, other servers, copy machines, fax machines, printers, desktop computers etc. Offices were truly needed until around 1998-2008 or so.
But after that - which is already some 15-25 years ago - most of us worked on a laptop that hooked up to whatever screen was available, and used email, chats and perhaps some collaboration software, and where data storage was in the cloud. Our cell phones were easily connected with office numbers. Lately, we don't need to sign anything physically anymore, and we don't need to write actual checks.
Nevertheless, going to the office kept being the preferred working mode, new office buildings kept being built, and rents kept increasing, long after the office wasn't strictly necessary. Only when the pandemic showed management that remote work works, did offices finally come out of fashion. Now, it's hard to imagine that companies will keep the office spaces when their leases expire without asking for large reductions.
Often it takes long for new tech and new habits to be adopted.
This is the more interesting part of the article IMO:
> The glut of downtown office space, combined with San Francisco’s high housing costs, has led many to envision converting downtown commercial spaces into residential buildings, but not one residential development firm bid on this property. One residential development group that considered a bid was Emerald Fund… [that] ultimately viewed the prospect of a residential conversion as too risky due to the city’s high fees and its low-income housing requirement. Presently, the city requires 23 percent of the units in a large development be set aside for low-to-moderate-income tenants, but this means that developers would need to charge a substantial premium on the market-rate units for the project to pencil out.
> …
> Developer Eric Tao noted that permitting and other city fees, together with the city’s affordable housing requirements, are so costly that the purchase price of the building would need to drop to less than $100 per square foot… to economically justify a residential conversion.
So you really have a market that is “upside down”: Employment (represented by office space demand) is way down, and that in turn softens the market for residential space, and on top of that the numbers just don’t make sense.
Edit: I also feel compelled to point out that “low-to-moderate-income” is measured relative to average San Francisco incomes, not to state or national averages. They might still seem very high to outsiders.
It’s likely the only way a residential conversion works is if it is literally funded by a non profit or church or government explicitly as low to moderate income only.
And those have their own approval and NIMBY problems.
SF stores have closed because their employees are no longer safe. Conferences are leaving SF. Mostly everyone who starts a family leaves SF.
Shoplifting, car break-ins, homelessness, drugs, public defecation, public intoxication, high costs of life. Used needles, empty bottles of alcohol.
There is no reason to be in SF anymore. If you think otherwise is because you've lived there so long that you've lost perspective of what you can acquire with whatever you are paying there.
The authorities in SF are the encyclopedic definition of learned helplessness.
Quick access to many museums, libraries, music institutions, and (for the supposed lack of children) great playgrounds. I spent a weekend with the in-laws in San Ramon, and nobody was outside, playgrounds were barren, and everyone seemed to be at the mall. So I guess I’m saying it’s a matter of perspective, and SF certainly isn’t perfect, but I still think there’s significant upside.
Instead of paying $5000 for a tiny 1 bedroom apartment so you can go to a nice library in SF:
Move to a cheaper place, buy the same books you were interested in borrowing brand new, plus bookshelves, plus a high end reading sofa, and perhaps even pay an actual human to read you the books and you will still would have spent less money. And if the book is not for sale, pay for a plane ticket, visit the library in SF and go back. Again, you would have spent less money.
Regarding the museum, you could move to a cheaper place, and each time you wanted to visit the museum, simply pay for a plane ticket, visit the museum, go back and still spend less money than living in SF.
Regarding the music stuff: move to a cheaper place, hire a musician full time, brand new instruments, a recording studio, and you will still have more money at the end.
Do the math. Living in SF is throwing money down the toilet.
Have fun drinking $50 fruit juice at "Joe & the juice".
Too bad we can’t convert any into housing or even have mixed use skyscrapers with residential and office floors. But that would mean building housing in California which is strictly forbidden.
Personally I think a mixed use skyscraper with residences, offices, shops, restaurants, etc would be totally cool.
Denver is an interesting case because, historically, a lot of the commercial real estate has been occupied by oil and gas (roughly 20%), as well as industries that serve oil and gas (lots of lawyers, etc.).
Oil and gas is a notoriously boom and bust as an industry. The knock on effect is that some management companies will hold back some vacancy at extremely high rates for the next boom. When you are dealing with 10 and 20 year leases, it can make sense to sit on an empty building through a few years of bust until a big tenant flush with cash shows up.
It’s a massive building in the north of Quebec that contains essentially everything you’d need to avoid going out in the cold Canadian winter: apartments, stores, a school, even a strip club and a prison. It also serves as a wind block for the rest of the town that grew up around it.
Mixed "residences, offices, shops, restaurants" in a building describes many of the ~6 floor apartment blocks around me, but a city also has industry — workshops, chemical processing, car repairs, factories — and if that's in buildings shared with residential then I've not noticed.
I assume so; without any actual knowledge, and a meagre GCSE grade B in chemistry, my imagination says illegal labs aren't going to have high quality safety audits.
$100/sqft to make residential projects viable? That’s quite low. They also say conversion would cost $1000/sqft, why would you need a million dollars to renovate < 100m2?
None of this adds up to me, appreciate if anyone has hard numbers for this.
Those numbers are probably accurate. The reason it doesn't add up to you is that you aren't thinking about the actual costs of residential conversion or the math behind $100/sqft.
The easy one: $100/sqft isn't $100/sqft for each apartment, it's $100/sqft of building. That means that you have to count hallways, lobbies, elevator shafts, mechanical spaces, internal walls, etc. All that adds up.
The hard one: The $1000/sqft conversion cost. This comes down to the fact that residential and commercial buildings have very different floorplans. Commercial buildings keep the plumbing near the elevator shafts because it's more efficient, but residential buildings need much more extensive plumbing on each floor to give everyone a bathroom and a kitchen. Electrical metering and wiring also becomes a lot more complicated. You also have to do things like putting up walls and light fixtures (usually commercial tenants pay for that in the spaces they rent) and installing residential appliances. All of that adds up to a quite significant cost in a place like San Francisco, notwithstanding the costs for permits.
That’s all pretty logical, but doesn’t explain these numbers. The average construction cost in SF is reported to be $440/sqft, already the highest in the entire world. How could conversion cost more than double? There must be a lot more to it than the 20% “cost” of social housing.
The $100 number is referring to the acquisition cost. Essentially, housing development is so expensive and risky in SF that the cost of the building has to be exceptionally low for there to be a chance of making an economic profit.
So you need to be able to acquire it for cheap because the costs and risk to convert are estimated at $1000. These aren’t just construction costs, but things like hiring an army of bureaucrats to get the approvals from the city, and the possibility that you might have to wait several years to get started while the paperwork gets moving.
Think of it this way: you have the opportunity to buy a house, except you can’t live in it for an indeterminate amount of time, it needs some renovations, you might have to rent the basement out at below market rates, and you still have to maintain it and pay the mortgage for however long it takes to sort all this out.
So how cheap does that house have to be before you’re interested (and can talk a bank into backing you).
That is maybe for the lowest cost, lowest quality houses in the US.
See "Average Construction Costs of Single-Family and Multi-Family Residential Buildings Per Square Foot in the U.S." on [1] for costs within major cities, you will see that costs are much higher than that, even if not 1k psf.
I think a huge part of that is getting things up to code because of zoning rules (eg minimum size of apartment, installing kitchens and bathrooms which requires adding plumbing that doesn’t exist, etc etc).
Yeah these buildings don’t have bulkheads or risers for plumbing every office. And the entire central air system has to be reworked. If it’s a concrete and steel building this is going to be a monumental undertaking to cut each floor up and run metal for every one of these changes.
"...I note that the cost of housing per square foot in Biloxi, Mississippi, one of the poorest cities in the country, with a median household income that is 60 percent below that of San Francisco, is $139 per square foot. And this is for a city that is not only poor but is chronically at risk of major flooding, which raises insurance costs and reduces home values. "
So, San Fran residential real estate needs to be 28% cheaper than Biloxi?
Purely guessing the 75% is a little dramatic. Basing it on pre-pandemic level to an action off price. So that could be a 30% up from trend "norm" compare to current much lowered market price while auctioning at 20% discount.
Still even if it was closer to 40% it is pretty massive in terms of Real Estate.
San Francisco, or Silicon Valley / Tech is also the most vocal proponent to everything could be remote should be remote. Along with all the layoffs this could be a perfect storm for office values.
Compared to which other industries? Not aware of any other industries pushing for remote
Yes some bigger tech companies are pushing back, but others are going all in. This industry is the prime example of remote working, even if some are going back
>Yes some bigger tech companies are pushing back, but others are going all in.
Google, Meta, Amazon, Netflix, Apple, Salesforce, Twitter, Lyft, Spotify, Doordash, Snap, Uber and Ebay are hybrid or in-office.
Shopify, Dropbox, Coinbase and Airbnb are remote. Slack is as well but it's own by Salesforce so probably not for long.
So I think it's safe to say that overall tech is pushing for return to office. It's probably even more stark if you take the number of employees in these companies into account.
Even hybrid working can reduce the need for office space significantly.
Companies that spread their employee office visits evenly through the week could achieve a reduction in office space of 20% / 40% by moving from full time office to 1 / 2 days a week remote.
It would make sense that the companies pushing for a return to office either own their buildings (ouch) or otherwise have financials (corporate or executive) coupled with the value of real estate. It’s not at all surprising or irrational.
Are they? Also seems like tech employees have been the biggest proponents of working from home, especially considering how many from the bay moved around the country to work remotely from wherever.
Within the last year I interviewed at more than a dozen tech companies and they were all remote jobs. The job I accepted had a local office but it’s entirely optional to go there.
Until they replace the people the LLM they certainly are the same thing. I know at some companies compliance with policy ranges in the 20-30% range. Are they going to fire 70-80% of the companies employees for refusing to return to the office?
The recent layoffs have shown how untrue this is - the tech set thought they were a special class of labor, and if you were "good enough" you wouldn't be let go.
Very accomplished, productive people have been let go in the recent layoffs. Being "productive" was always a paper shield, but it's not even that anymore; I think they're trying to disabuse the tech set of the notion that they aren't labor to bring wages down.
So much needs to change for things to go back to anything resembling normal, that I assume it will never happen. Basically everything the SF supervisors, mayors, SFPD, and DAs have done has made the city less safe, less livable, more expensive, more politically hostile, and all of that has led to a downward spiral. Instead of building more housing, they built more commercial real estate. Instead of making BART safer, they offer platitudes and less than useless policies. If you didn't take advantage of the pandemic to get out of San Francisco, I feel like you made a mistake. I love the geography, weather, food, and lots more about San Francisco, but the way it's managed is unaccepted. I have never seen nastier and grosser things than on the streets of San Francisco. The people giving out meth pipes and needles are morons and harm reduction clearly isn't working--overdoses just keep increasing even though the harm reduction people are getting what they want. There are virtually no consequences for selling fentanyl.
Ok, hear me out. Take Salesforce tower and convert the floors into shopping/office/restaurant/apartments. One building that I would never have to leave unless I wanted to. I think that would be awesome.
You've exactly described the plan for Marina City in Chicago circa 1963.
https://en.wikipedia.org/wiki/Marina_City This is fitting because downtown Chicago was considered undesirable to live in then.
oh, i wish they did that. That area turned out nice and bright, nice to walk by. But somehow it's a dead desert. The massive bus terminal seems empty most of the time. Even the not-nearly-as-grandiose caltrain station has more life around it.
I wouldn't count on that. It's anecdotal, but I used to occasionally visit Oakland and now I avoid it entirely. I see way too many violent crimes in the news and it's just not worth it. There's nothing in Oakland I can't do somewhere else and feel safer.
No mention of COVID, but you'd be hard-pressed to find a big city in the US where COVID hysteria was more intense and longer lived than SF. SF has many compounding problems, but the failure to do any sort of cost / benefit analysis with respect to COVID harsh measures really did the city no favors.
I don't know how it was in SF but here in Toronto it got pretty bad and even now large tracts of downtown are devoid, Toronto has an underground pathway system (sort of like a mini-city) that connects a large part of the downtown core its designed so people can get from one building to another without ever going outside in the winter - as you can imagine it got pretty eviscerated during the pandemic. Even now, tons of new condos are going up in the city but the units at the street level (for commercial usage) remain empty even as tenants move in.
The little town in Costa Rica where I live got thousands of new Canadian residents over the past 3 years. The vast majority are from Toronto. The next town over has a huge Quebec expat community.
What a very odd article to come from a think tank, it's titled and reads like something from the NY Post. At any rate, reading the article shows that a specific buildings value fell 75%. Anyone have better data? And how it compares to other cities?
When commercial loans are renewed (and they are because commercial loans are usually rolled over and not paid off, ie interest only) things like the occupancy rate, rent cost, creditworthiness of lessees and other things are factored into the new loan terms. So if the rental rate is lower then interest will be higher on the loan. Or the loan provider will okay a smaller portion of the loan requiring you to cough up the difference.
Example a $10m building, you put $1m down on. You go to refinance the loan and they are only willing to float you $7m now because you arent able to charge as much rent to tenants. Thus requiring you to come up with $2m or lose your $1m investment and the building.
Something being true is the bare minimum and has little bearing on what should be done from there.
Example: It was a fact that Germany was left in an impossible political and economic situation after WWI, and it was a fact that the leftist government at the time accepted the agreements that led to that impossible situation. But simply saying that leaves out context about who was truly to blame, something that a young war veteran took advantage of in short order. So to avoid being tricked by people telling easy truths, it’s important to be critical of all sources of truths, especially ones with an ideological bent. And during that process it is acceptable to discard partial truths in favor of a search for the complete story.
There are so few public market transactions for commercial buildings that each one is an important data point. An auction as well so there are no backend side deals that would make the value uncertain. This is a good data point.
I think the title and other conjecture in the article turned me off, but this makes complete sense! I also saw elsewhere in the thread that SF Bay REITs are performing about this poorly.
This article is just referring to just one building. But it does have a point and may be showing a trend to something like "the free market works".
Until cities solve the rent crisis, I believe this will happen more and more. I think the only way to solve that is to build and build, but NIMBY people and Companies who love high rent prices seem to do all they can to stop the building of Apartments.
But, in SF case, it may be a good thing. Having a city like that in a severe earthquake zone is rather foolish. I can hope people wake up and move to more environmentally stable areas of the US. By that I mean places with low risk of earthquakes, flooding and droughts. They do exist, but no one wants to live in those areas.
> Having a city like that in a severe earthquake zone is rather foolish
What is this based on? Tokyo, Jakarta, Manila and Los Angeles are more or similarly seismically active as San Francisco [1].
> They do exist, but no one wants to live in those areas
Because they’re fundamentally less productive. Natural harbours, fertile soil, striking vistas—each is related to geography, geology and economic potential. Landlocked, sterile, featureless terrain is less productive, less appealing and less valuable than natural port near volcanic soil and new mountains.
Western Europe, at least. Possibly Australia expect for the forest fires, but that might just be availability bias in the news I see as it's the other side of the planet and hardly anyone (in relative terms) lives there.
Western European cities flood, most recently in 2021. The short list of low-risk high-GDP countries is limited to city states and the likes of Hungary, Czechia, Qatar, Denmark, Switzerland, Austria, Finland and Iceland [1]. Worldwide.
Western Europe is about to get so fucked by climate change. The area is basically unlivable without the North Atlantic Current - geographically the UK/France/Germany are at about the same latitude as Alberta and the Siberian Taiga, Scandinavia is the same latitude as Alaska and the Yukon. They would have similar climate if it weren't for warm Gulf water circulating in the Atlantic.
There's evidence that the current is already slowing [1], and the midpoint of estimates for when it might collapse is at 1.8C warming, something we seem pretty likely to blow past within a decade or two.
It'd be bad for Australia and the Southwest US as well, since collapse of the AMOC would bring permanent La Nina conditions.
Hungary is quite nice though. Also, I'll take the Balkans over Western Europe any day. Not Bosnia or Kosovo, but the other EU countries, maybe even North Macedonia or Serbia. Or Southern Italy if you also want to be sophisticated.
I'm drawing a blank. Pretty much all of the mid-west is susceptible to tornadoes. The east and southeast to hurricanes. The west to earthquakes. The northeast to those crazy blizzards they sometimes get.
Because it doesn’t exist. You don’t build a city where you fortress. The oceans that give rise to natural harbours and ports also bring risk of floods and tsunami. Similarly for fertile riparian. The same seismology that raises the mountains which squeeze rain from clouds and provide stunning vistas also level badly-built homes.
The risks can be mitigated, but never eliminated. Look at the list of natural-disaster safe cities in America, and find a sea of low GDP per capita [1]. In an unexpected place we find the old adage reaffirmed: risk and reward come together.
> Earthquakes occur in the central portion of the United States too! Some very powerful earthquakes occurred along the New Madrid fault in the Mississippi Valley in 1811-1812. Because of the crustal structure in the Central US which efficiently propagates seismic energy, shaking from earthquakes in this part of the country are felt at a much greater distance from the epicenters than similar size quakes in the Western US.
And yes, while the entire west coast is red in the risk category... there is a good sized blob in the midwest.
Mid west and north east basically have no natural disasters. But cold winters and hot summers. Depends on your definition of livable. I don’t mind wearing winter clothes in winter and AC in the summer.
Midwest and northeast have flooding, droughts, tornadoes, hurricanes, blizzards, etc. Maybe not earthquakes (or wildfires), but I worry about earthquakes and wildfires much less than I used to worry and have to deal with frozen pipes and snow removal and humidity.
> At least 36 deaths were reported to be related to the storm, many of them in shoveling or auto-related incidents, and the total damages were US $1.8 billion.
> There were 92 significant tornadoes in the 8 county Chicago metro area between 1855 and 2008.
> The deadliest tornado occurred on April 21, 1967 during an outbreak of 5 significant tornadoes. A violent F4 tornado formed in Palos Hills in Cook County and traveled through Oak Lawn and the south side of Chicago. 33 people died and 500 people were injured by this 200 yard wide tornado that traveled 16 miles and caused over $50 million in damage.
> The most recent significant tornadoes occurred on June 7, 2008 over Will and Cook Counties.
> The only F5 tornado to ever strike the Chicago area was on August 28 1990. This tornado formed near Oswego and passed through Plainfield, Crest Hill, and Joliet. The tornado killed 29, injured 350, and caused $165 million in damage along a 16 mile path.
It is all subjective of course, but I will take the lower chance of the high severity event over the high chance of the somewhat lower severity event. I have had to dig myself out of snow many times already in my short life and I have been through multiple power outages due to rainstorms or ice bringing down power lines.
But I have never had to deal with an earthquake or wildfire (other than staying inside for a few days). And I have been through multiple power outages due to rainstorms or ice bringing down power lines.
The great appeal of San Francisco is that you don’t have to think about what you’re going to wear at least 300 days of the year. If you’re outdoorsy at all it’s very hard to go to the rest of the US and feel trapped inside. Unfortunately for me, family moved there after I moved to be close on the west coast, so I get to experience that 2 weeks every year.
I would also dispute “no natural disasters”. There are serious winter events in those regions (and crazy floods depending on where you are in the Midwest) that happen basically yearly.
I don’t think any part of the world is without significant tradeoffs, you just have to find the ones that matter to you.
Native New Englander here, married a Californian. My wife likes to say that "Every winter in New England is a natural disaster" whenever I bring up moving back.
Everyone in the replies to this comment are naming places so dark and grim in Winter that I personally couldn't survive there. A summer in the southwest US is easier on me than even a mild winter in the northeast.
I was living in Georgia when CNN's building in downtown was hit by a tornado. They're not nearly as bad as in the midwest, but they certainly happen. Mind you, it's a perfectly reasonable place to build up, but the likelihood of getting killed in a tornado over the past 100 years looks to be worse than the likelihood of dying in an earthquake in California over the past 100 years (slightly lower numbers from what I could gather, but dramatically lower population).
Phoenix (and Albuquerque but I'm less familiar with the specifics) is in the desert; both the water it gets and the ambient temperature are getting worse due to climate change. There are already legal fights over water rights in the greater Phoenix area, and it's just going to get worse. That is not a place to be building up.
> Scottsdale cut off Rio Verde Foothills from water sales in January due to worsening drought conditions. That left hundreds of homes in the unincorporated community without a reliable water source.
> Arizona lawmakers earlier this week sent a bill to the governor’s desk that would force Scottsdale to resume sales, for at least a few years while the community works out a long-term solution. But in a letter to the governor, Scottsdale’s mayor and City Council say the bill penalizes their city for sensible water management.
> The bill requires the city to deliver at least 150 acre-feet to its standpipe each year, through 2025, unless outside circumstances reduce whatever source they use for it. And Scottsdale can’t charge Rio Verde Foothills residents more than $20 per 1,000 gallons for that water.
> I was living in Georgia when CNN's building in downtown was hit by a tornado.
How many people died? How many billions of damage occurred?
Of course stuff happens, there are also minor earthquakes. But I think the point upstream is to avoid massive events. A tornado downtown every decade that does a few million in damage is very different than a 1% chance the city is destroyed.
> "Henry C. Finkler was a bicyclist. And he became, I have to say, fanatically interested in weather. And he recorded, every day he rode down the hill, what the air temperature was, what the winds were, the number of days of rain," Svanevik said.
> It’s Finkler who first claimed there were only three parts of the world that had perfect weather: the Canary Islands off the coast of northwestern Africa, North Africa's Mediterranean Coast, and anything within a 20-mile radius of Redwood City.
The weather is nice, I'll grant you that. Any Atlantic climate place with volcanoes has nice weather. I'll take the volcanoes over The Nederlands, thank you.
I have faith in the Builder's Remedy and how that invalidates local control when a required housing element plan isn't submitted. Papers in Marin are cringing about the high rise going up on Sloat Boulevard in SF's Parkside/Outer Sunset, I hope Marin ends up worse than Santa Monica with the remedy.
I think you may be calibrating for the wrong thing in terms of sampling. The idea that this is "just one building" doesn't mean that it isn't a representative sample: this one building represents hundreds of leases, if not a few thousand. If the aggregate value of those leases is down 75%, that means something.
That seems like it's going to have two major consequences - when the values on those buildings fall, SF is going to lose a lot if income at a time when the quality of life is already greatly suffering there. On top of that, a lot of those buildings have large loans against them that may well become greater than the value of the buildings. The latter certainly feels like the sort of thing that could ripple through the economy as building owners have to sell off assets to make loan payments.