Why 2023 could be the best year in a decade to buy a condo in San Francisco.
San Francisco is the city of booms and busts, this dates to the early years of the city when fires razed the wooden sailing vessels and destroyed the waterfront, a few times. Why else is the Phoenix so symbolic of San Francisco.
I have had the pleasure to work in the San Francisco real estate industry for the past 2 decades, having worked through the 2003 downturn, the great recession of 2008, and Covid. So, I know how the market cycles have worked in the past and can give some guidance onto the future market. However, I don’t have a crystal ball.
Today we are amid a market correction, not a market collapse, one that I thought was coming before Covid in 2019. At the time I had a few people ask if “this was the top of the market”? Clearly at the time that was a concern, but no one could pinpoint a distinct marker that indicated things were changing. Also, that was the last time I felt the market being well balanced, meaning sellers and buyers were on equal footing.
The San Francisco Real Estate Market During Covid
During Covid, with the Fed dropping the rates to a ridiculously low level for too long, (even leading up to Covid interest rates were too low in my opinion), the highs we thought we had in 2019 would be outpaced by demand fueled by very low rates. People would easily overbid to get into a property.
The ramification of that is we are left with people who were in fear of missing out (FOMO), so prices on single-family homes increased and once again the market was incredibly competitive for buyers. Leaving homeowners who refinanced with low rates in a very good position for the long term. For those who overbid and are now under water, those people most likely will need to stay put for some time or face the reality of their financial situation. Being underwater is not a good feeling but these new owners also have the ability to rent their properties out, bringing in cashflow if they decide to relocate, plus they are also living with very low-interest rates.
Those homeowners that refinanced at low rates have very little incentive to relocate to another home as they will be met with interest rates that are about double today. Leaving inventory very low.
For those owners who are relocating, divorcing or have enough equity to not really care about selling in today’s market, those people are real sellers. Some need to adjust prices to today’s values compared to last year, others are more realistic.
The San Francisco Condo Market
Now that was a synopsis of the market in general, however, San Francisco condos for sale are a bit different than single-family homes. During Covid, people gravitated back to the older parts of the city, for instance, older neighborhoods such as Russian Hill, Pacific Heights, and Noe Valley. Units for sale with some outdoor space did very well, however many units in the larger elevator complexes lingered on the markets, especially for South Beach condos for sale. This was the hardest hit area of the city during Covid and has not necessarily bounced back. The hope was that once the vaccine was in the population then employers would want to bring people back into the office. It simply did not work out that way as employees wanted to keep the “work from home” lifestyle.
Personally, I do think this will be changing as the owners of the larger office buildings will give incentives for companies to move back into the workspaces. Also, I recently read that San Francisco topped London as the #1 international city to invest in, citing the venture capital companies that are still in SF and the Bay Area, plus the higher level of skilled workers. In the end, I firmly believe the city will be making a rebound.
Location, Location, Location
There is a certain absolute with this statement when it comes to San Francisco real estate. The city is a lifestyle city, plain and simple. The most in-demand neighborhoods will always hold value, especially if you are talking about Pacific Heights for instance. The lifestyle is wonderful, and every San Francisco neighborhood is different. I tell people to explore the city and find the areas they love the most. See what you can afford in those neighborhoods. The reality is many of those areas most people can only afford a condo or a TIC unit, not a home. For instance, you can find plenty of 2-bed, 2-bath Pacific Heights condos for sale for around $1.5M, but a home will easily cost you a minimum of $4M. Buyers need to compare what that same $1.5M gets you in a home and what neighborhood, to see if it’s a match. So people make adjustments to condo living to live in the best areas of the city.
“Marry the house….or condo, and date the rate”
Remember in San Francisco we have old Victorians, mid-century and new construction all within more than 88 different neighborhoods. When you see a property you like you need to ask yourself when is another unit like this coming back on the market? Depending on the location, the answer could be over a year. Not so much in South Beach. If the property checks all the boxes, it has the size, the location, condition, then most likely you should really consider it especially if you can push the price further down.
A perfect example is that I recently sold a large 1850 SqFt condo in Pacific Heights on Pacific Ave. for around $1.550M. I knew that there was not going to be one like this for some time at this price point, I reviewed the comps and sure enough, I was right. My client purchased the unit as there will not be another similar unit at that price point for some time, a year, maybe more.
The reality is we have already seen 12 consecutive months of lower property sales, plus we have seen values drop between 8-12% depending on the location and what the unit is. When we have already seen price drops for 8 months, yes there might be more to come, but buyers are in a position to keep pushing those values down. Especially when there is volatility in the equity markets and interest rates are being pushed higher by the Fed. Look at days on the market (DOM) and get a feel for the seller’s motivations, look at tax records to calculate owner equity. The more equity and motivation, the more flexibility the buyer may have to negotiate a good deal.
Bottom line, it is true and especially in SF. In the current state of the market, if you find the right condo, that you like and envision yourself in, then jump on it as long as you can comfortably afford the higher interest rates. Know that the interest rates will not be forever and that you can refinance down the road. So be vigilant, look at property if you are in the market as you never know when the right opportunity comes along.
Politics and Perception
The elephant in the room is the city politics and the perception of the city. We all know that the city is battling certain demons on the streets. It is true that we have a terrible fentanyl crisis and that the city management is somewhat paralyzed on just how to fight the issues. The police are there to service and protect the city, not necessarily to help drug addicts, plus you can’t just put these people on a bus with a one-way ticket. People in the city need more help for sure.
The one thing to remember is that drug addicts don’t necessarily travel too far from their area. Neighborhoods like the Tenderloin and parts of SoMa are areas to simply avoid. You do not see this level of homelessness throughout the city, just in particular areas.
The voters in the city removed the DA in the last election, plus the mayor is getting criticized and is working to improve conditions. I think this is a long-term issue that all voting citizens are troubled by, and the only way to improve this is to fire certain board supervisors and the political class in the city. It will get better over time, but the national media do play into the stereotype.
In Conclusion
Owning San Francisco real estate is an achievement in anyone’s life. During my time as a broker, I have heard people say it is bulletproof, but I need to disagree. The city is amazingly complex, with a different type of ownership from single-family homes, condos, TICs (tenant in common), and stock co-operatives. It is very easy to get into the wrong type of ownership or the wrong location, or simply get into the bidding frenzy and spend too much to purchase.
In today’s market, we can take advantage of the uncertainty of interest rates, inflation, and even geo-political movements. Opportunities not seen since 2008-2011. It’s a crazy world for sure, but your purchase does not need to be crazy, be calculated, and take advantage of motivated sellers….the key term here is motivated. There are people in today's market that have equity and that are willing to take a loss or a good size haircut. The funny thing is people are always more willing to overbid on a property to win the bid, vs. looking at those units that might simply be overpriced but still very good units in good locations. In my opinion, be bold and aggressive in your offers, if you offend the seller then so what. Remember you make money in real estate when you buy the property, not when you sell it.
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