By Daniel and Gavin | Capital Bridge Partners
When comparing major US cities, New York and San Francisco are often measured side-by-side. While their populations and industries differ significantly, both are geographically constrained hubs of massive economic productivity. Macroeconomic trends tend to have similar effects on both metros. During the recovery from the COVID-19 pandemic, though, the two cities diverged significantly in the market for rental housing.
This past year, residential rental rates in San Francisco stagnated to $3,500 on average, about 12% below their pre-pandemic peak. Meanwhile, NYC’s rental rates have surged to $4,600, a staggering 23% above their previous high in March 2020.
Vacancy rates have likewise split, with San Francisco at 7.4% and NYC at just 2.5%, a historical low. What explains these differences, and can NYC’s housing recovery predict where San Francisco is headed?
Many of the factors that would normally explain this diverging performance actually tracked across both markets. In both cities, new housing supply remains limited and high interest rates limit new homebuyer purchasing power. Costs of food, utilities, transportation, and entertainment are likewise similar in both metros.
Differences emerge when looking at the cities’ return-to-office dynamics. The San Francisco office market seems significantly weaker than that of New York’s: vacancy in SF is almost 34%, compared to just over 20% in New York. More importantly, Average Weekday Office Occupancy is higher in NYC than SF.
These two statistics – Office Vacancy & Average Weekday Office Occupancy – come into sharp contrast when considering unemployment. San Francisco has just a 3.2% unemployment rate, significantly lower than New York’s 5.3%. Despite lower unemployment, fewer people are headed into the office in San Francisco!
Real estate investment services firm Matthews suggests that the environment in New York’s office districts has remained more appealing than that of San Francisco: “the vibrant dining, culture, and arts scenes in New York City have emerged as significant drivers of demand for renters.” This points to a more active city center, further supported by differences in tourism activity: hotel occupancies in New York and San Francisco were down 11% and 20%, respectively from 2019. The relative increase in activity that New York has enjoyed predicts a positive spiral, and may lead to further improvements in government tax revenue, employment opportunities, and demand for real estate.
The path to recovery in San Francisco’s rental market may therefore lie in increasing foot traffic in the downtown area. Employers in San Francisco have lagged behind the return to office trend. There is now a strong move to adopt hybrid or in-person mandates over the coming year. San Francisco’s economic weight is expected to continue to be a source of productivity with conferences returning to the city as well as a burgeoning new industry, artificial intelligence. AI is expected to largely be centered in the Bay Area. As the return to office continues to take hold in the Bay Area, San Francisco’s appeal to apartment renters, and overall as a center of activity, may increase.
San Francisco has been hampered by lingering effects of the pandemic. We can see from New York that a return to the office may have a multiplier effect spurring tourism, arts, food, entertainment, all of which would benefit apartment rental and vacancy rates. If San Francisco can spark a similar increase in office demand, New York’s recovery tells us the benefits to the residential rental market could be significant.