Three reasons why New York and San Francisco aren’t dead

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

“The reports of our deaths are greatly exaggerated”– New York City and San Francisco

The Bloodhounds have been talking about San Francisco and Manhattan’s death over on Facebook.  The general consensus is that they have been ruined by Marxist mayors (they have) and become much too expensive for people to live, work and play (they have).  The pandemic exacerbated these flaws and now that everyone is working from home, these cities are destined to crumble into ruin.

Greg Swann fired a shot the other day, right here in Bloodhound Blog.  I don’t dispute that both cities are in trouble.

This graphic shows the growth in year-over-year housing inventory.  While most of the country is experiencing actual declines in housing inventory (less homes for sale than the year before), NYC and San Francisco have more homes for sale than the year before.

Some reasons for the decline in housing supply are:

(1) homeowners are hunkering down because of the pandemic,
(2) some homeowners are in trouble and taking advantage of the mortgage forbearance program.— they are delaying the inevitable sale,
(3) new housing construction has slowed or halter in most major cities.

Greg Swann went so far as to suggest that cities might be dead forever, thanks to the internet and remote work opportunities.  While his criticism of poorly run cities is valid, the notion that the future of work is a “laptop in the basement” is not.

I am the one of the most tech-friendly Luddites you’ll ever meet.  If an app or platform is relatively easy to use, I embrace it.  Back in the early days, I was teaching real estate agents and lenders how to build IRL networks from social media.  I have been doing that since 2003.  The key component to success in online networking is to connect online but to meet, and develop a relationship in person.  Human beings are mammals and we like to cuddle.  The cuddlers will be more productive than the email-ers every time.  Keep this in mind when you think that humans will scatter to the mountains and do business on Zoom forever.

Here are three reasons why neither San Francisco nor New York City is dead:

Young people want to live, work, and play in person.

There are social reasons for why young people want to be with one another (develop friendships, find a spouse, see new things, etc) but there is a very specific reason why young people want to get back to the office and stop working remotely– mentorship.

Architecture and design firm Gensler surveyed 2,300 U.S.-based office workers at companies with at least 100 employees each. Its survey reached conclusions similar to the Cushman & Wakefield one: Younger workers find they face more challenges than older ones in working from home.

The younger workers reported more distractions as well as less experience with working from home in the first place. These have made it more difficult apparently for millennials and Generation X and Z members to maintain a life-work balance. A quarter of baby boomer respondents, for instance, said that it was harder to maintain a work-life balance working from home. Compare that with 33 percent of millennials and Gen Z and 37 percent of Gen X.

Then there was a less tangible challenge for the younger cohort, one that executives have mentioned as an impetus for getting people back into the office as soon as possible. Basically, younger workers are missing out on mentoring and making connections (something very important for advancement in the commercial real estate industry itself).

“They are less likely to feel as if they’ve made a difference or completed the work they needed to do at the end of a typical workday, according to survey responses,” Gensler’s report said. “Working from home may be having an alienating effect on younger workers, too, as they may feel a gap between their work and their company’s mission.”

Markets are discounting mechanisms

Is $3700/mo too much for a 1BR apartment in San Francisco?  Probably but sometimes it takes catastrophic events to fix market aberrations.  Certainly, rents will plummet in Manhattan and San Francisco, dropping the high valuations for multi-family properties.  Lenders will lose money as those building are foreclosed and sold at a loss.  But for every seller, there is a buyer, a buyer who assesses risk and sets a price on that risk.  Real estate investors seek yield and price appreciation.  If rents are cut in half in San Francisco, the foreclosed condo selling for a with a pre-pandemic valuation of $1,000,000 is going to drop in price until the net operating income is attractive enough to investors.

Catching knives is dangerous but investors seek return.  With return comes risk and the greater the risk, the greater the return.  It’s going to be hard to predict where the bottom might be in New York and San Francisco but investors will test it on the way down, and fuel the rebound on the way up.

Retail real estate buyers (owner-occupants) could very well be the ones who set the floor.  I spend a lot of time speaking with young people (under 25) because they tell me where they are going to rent (and maybe buy).  If you speak with college kids today, you will learn that they want to be back in the cities.  Maybe they will graduate and change their minds but I don’t think so.  If rents drop to a palatable price, today’s college kids will become tomorrow’s residents of SoHo and SOMA.  When listing prices drop to “fundamental value” , the Gen-Z kids become urban homeowners.  Gen Z is almost as big as The Millennial Generation so expect the ball to reinflate.

Developers are creative in re-purposing buildings

A few years back, I had the brilliant idea of re-fitting shopping malls to become mixed-use villages.  Big box retail stores could become senior-housing, some retail could be converted to medical offices, and shopping space might be saved because a “village” would live there.  I lacked the capital and connections to pull it off but I pitched a few folks and was brushed aside.  A couple of years later, someone started doing what I thought could be done.  I say this not to pat myself on the back; any half-wit knows it makes sense to fix a car rather than to buy a new one unless the costs are prohibitive.  The same principle applies in buildings.  It’s happening all over the country. 

“Wait!”, you say.  “If you increase supply and demand is falling, prices will go even lower !”

I get that.  Don’t ignore the desires and size of the youngsters, though.  If you speak to Gen-Z kids, most would say they couldn’t afford Manhattan or San Francisco but, with increased supply and lower prices, both cities become affordable again.  Ask them NOW with reduced living costs and watch how their answers change.

The Trump International Hotel started as an office building and the original plan was the convert it to apartments and condos.  In 2025, Ivanka, Jr., and Eric may re-examine the building and realize that their step-brother and his friends need a permanent place to live.

That’s how these cities come back.

C’mon, folks.  We are talking about “The Big Apple” and “The City By The Bay”– they ain’t dying