Boom & Bust: Tales of the City (and its Office Cycles)
By Daniel and Gavin | Capital Bridge Partners
San Francisco is the original Boom & Bust town. In my own half century, I’ve seen two cycles that were uniquely volatile in San Francisco: the Dot Com Bubble and the COVID pandemic. While these periods of expansion and downturn were certainly felt worldwide, they affected the Bay more than any other MSA.
The Bay Area is home to the technophiles that developed the communications software that enabled a touchless, work-from-home economy when the pandemic hit. Because San Francisco is a hub of global technological development, it has been a challenge to convince its workers – so proud of their advancements – that there is value in a personal touch, collaboration, and… coming back to the damned office.
Together, lack of tenant demand and high interest rates have decimated the office markets since the pandemic. Many investors doubt whether the San Francisco office market will ever rebound and values are now in a free fall.
However, many wildfires leave room for new growth and investors with liquidity and a high risk tolerance are betting on the next boom.
We are starting to see properties offered at discounts so substantial that they can set the market toward renewed growth. Earlier this year, the iconic 350 California sold for $61MM, a nearly 80% discount from peak pricing. This summer, 61 Spear sold for over 60% off peak pricing. These discounts will allow investors to renovate and offer more affordable rents to new companies just starting in the City.
Borrower defaults offer a unique opportunity for new investors to lower their basis and make San Francisco cheaper. Recent developments such as the default of Jamestown LP on two San Francisco office buildings and the bankruptcy of WeWork are examples of such opportunities. Again, this reset in cost basis may allow new landlords to adjust rents to meet a new market of ever-evolving San Francisco tenants.
To this point, some tech firms are showing a renewed interest in San Francisco office space. Last week, Microsoft announced the opening of an AI Co-Innovation Lab located at 555 California St. Hive AI recently subleased almost 60k SF of office space downtown, and OpenAI closed a deal to take over almost 500k SF of office space from Uber. As the AI industry matures, and tech employers increasingly recognize the benefits of a hybrid work mode, office landlords may increasingly be able to fill vacancies created during the pandemic.
In finance, we are taught that past performance does not determine future results (booms do not always follow busts!). But, the main lesson in history class is that it tends to repeat itself. San Francisco has proven our history professors correct many times. The pricing reset and signs of leasing activity provide both hope for the future, and a hint at a potential boom ahead.