The commercial real estate market in Downtown San Francisco has been experiencing significant changes over recent years, with commercial demand dropping to near zero after the mass-exodus of corporate San Francisco. Office worker's fled for anywhere-but downtown San Francisco, leading to recent tax cuts announced by the city's mayor. These changes are expected, or better said hoping to, have a profound impact on the residential condominium market in surrounding neighborhoods, particularly in South Beach and Mission Bay.

As of this writing, Downtown San Francisco has an estimated ~31% commercial tenant vacancy rate. Q1 of 2024 is a significant period for commercial real estate in SF; an impending lease-cliff with major office lease commitments expiring.

I will aim to explore the potential effects of these changes on the residential condominium market in these areas, using sales data to supplement.

Current State of the Condominium Market in South Beach and Mission Bay

South Beach

The South Beach neighborhood currently has a diverse range of condominiums for sale, with prices ranging from $649,000 to $3,600,000. The average price of a condo in this neighborhood is approximately $1,500,000. The condos vary in size, with living areas ranging from 658 square feet to 3032 square feet. Most of the condos have 2 bedrooms and 2 bathrooms, and many of them have open house events scheduled, indicating a healthy level of activity in the market. South Beach Condos

Mission Bay

In the Mission Bay neighborhood, the condominium market is also quite active, with prices ranging from $980,000 to $1,679,000. The average price of a condo in this neighborhood is approximately $1,400,000. The condos in this area also typically have 2 bedrooms and 2 bathrooms, and many of them also have open house events scheduled. Mission Bay Condos

The Impact of the Commercial Real Estate Market on the Residential Condominium Market

The commercial real estate market in Downtown San Francisco is expected to experience a surge in activity due to the recent tax cuts, an attempt to resuscitate the district after years of COVID related office vacancies, and the overwhelming new trend of Work From Home.

The goal of preferable tax treatment to big business is likely to lead to an increase in the number of businesses moving into the area, which in turn will increase the demand for residential properties in the surrounding neighborhoods. It's no secret they have been in a state of free fall for quite some time now.

I recently saw a large 2 bedroom unit in Millennium Tower on the 27th floor available for under $1,500,000, a true sign of the times for the building itself, and the city at large. If San Francisco cannot attract business back to the downtown area, residential real estate will continue to free-fall in value.

Increasing Demand

As more businesses move into Downtown San Francisco, the demand for residential properties in nearby neighborhoods like South Beach and Mission Bay is likely to increase. This is because employees of these businesses will need places to live, and many of them will prefer to live close to their workplaces. This increased demand could lead to an increase in the prices of condos in these neighborhoods.

Recently Increased Supply

The increased demand from 2012 to 2020 lead to a massive increase supply of condos in these neighborhoods. Developers saw the increased demand as an opportunity to build more condos. Unfortunately, COVID struck right at the end of a strong building cycle. 4 local high rise developments all completed construction in 2019/2020, leading to a massive surplus of units available in the local market. When demand dropped off abruptly in March of 2020, the Increased supply outpaced the demand, leading to a downward pricing spiral where homeowners were forced to chase the market and slash value in order to achieve a sale. This has been the trend for the past few years.

Conclusion

The commercial real estate market in Downtown San Francisco is likely to have a significant impact on the residential condominium market in surrounding neighborhoods like South Beach and Mission Bay. The exact nature of this impact will depend on a variety of factors, including the extent to which the demand for condos increases with governmental tax changes and a vested interest to drive business, and life, back into these once vibrant areas of San Francisco.. However, it is clear that anyone interested in buying or selling a condo in these neighborhoods should keep a close eye on the developments in the commercial real estate market in Downtown San Francisco.

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