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Ultra wealthy are putting money behind bets on San Francisco's comeback

Karen Breslau, John Gittelsohn, Bloomberg News on

Published in Home and Consumer News

Goodwin Gaw is convinced people must think he’s “an idiot” after he bought a foreclosed San Francisco office complex formerly owned by Blackstone Inc. for $82 million.

Roger Fields, who recently acquired a former Wells Fargo & Co. office at 550 California St. for $40.5 million, says you need a “cast-iron stomach” to buy in this market.

But for all the worries about a doom loop fueled by post-pandemic hybrid work, persistent homelessness and a fentanyl epidemic, San Francisco is once again attracting money. Powered by an AI boom and rebounding real estate demand, the city has halted years of population declines and is adding jobs.

Home sales jumped 22% in April to the highest monthly count since mid-2022, according to property brokerage Compass Inc. And after lagging badly last year in a closely followed measure of foot traffic, the city is now posting gains that place it in the top 10 nationwide.

Investors calling a bottom on real estate aren’t the only ones betting on a comeback. Visa Inc. is opening swanky new offices this week near Oracle Park, the San Francisco Giants’ baseball stadium.

Nintendo recently chose the city’s Union Square neighborhood as the site of its second US retail store, a sign of optimism in a shopping district so distressed that the owners of its largest mall gave up the property to lenders.

Anchor Brewing Co. is reopening in its home city, a year after the former owners blamed the pandemic and falling sales for putting the oldest US craft brewery out of business. The new owner, New York billionaire and Chobani yogurt founder Hamdi Ulukaya, said he’s betting not just on the company but also on San Francisco.

“Both are experiencing the magic of rebirth,” Ulukaya said in a statement last week announcing the acquisition.

The recovery has its limits. It’s slow and uneven, while the city’s structural problems run deep. Closing a projected budget deficit of almost $800 million over the next two years has required cuts to some city services. San Francisco had a record 806 deaths from fentanyl last year. Pockets of crime and desolation still fester around Union Square and the Moscone Convention Center, deterring business travelers.

But there are mounting reasons for optimism, starting with the San Francisco Bay area’s underlying riches.

The region has more billionaires than any metro area in the world and ranks second only to New York for residents with at least $100 million in “investable wealth,” according to Henley & Partners. Even for the merely affluent, soaring stocks have helped to bolster prosperity in the world’s technology hub.

The city eked out a net gain of about 850 residents in 2023, keeping its population at a little more than 840,000, based on state estimates. While the growth is minuscule, it represents a psychological turning point after population declines during the pandemic.

“People don’t move to a place if they think it’s in a doom loop,” said Ted Egan, San Francisco’s chief economist.

The city still leads the US in office vacancies at more than 36% — a significant economic drag. But the crisis has begun to plateau as AI startups fill some tech-company voids.

OpenAI subleased about 500,000 square feet (46,450 square meters) at Uber Technologies Inc.’s headquarters last year. In May, Scale AI subleased about 175,000 square feet from Airbnb Inc. Software firm Rippling quadrupled its footprint, taking over nine floors in a building on California Street formerly occupied by WeWork.

In a sign that the market has been absorbing excess capacity, sublease space declined to 8.6 million square feet in the first quarter from a high of 9.6 million square feet in mid-2023, according to brokerage Newmark Group Inc.

Traditional tenants, such as finance and legal firms, are returning to the market. Non-tech companies make up two-thirds of the tenants in the market these days, as lawyers and other professional service workers return to the office and their employers take advantage of deals created by the vacancy glut.

“Now only about 33% of demand is tech, almost exactly the inverse of pre-Covid,” said Roman Adler, a Newmark broker in San Francisco.

 

Fields picked up the former Wells Fargo office building at a 63% discount from its 2005 sale price, property records show. Now he’s offering space at $40 or less a square foot, about half the asking rents elsewhere in the financial district, and signing one new lease a week.

“We’re moving through this process,” he said. “As we digest the pain, the healing will come.”

Gaw’s firm had previously owned the office complex that he got in a December loan sale for about a third of the 2018 price tag of $245 million — when he sold the Jackson Square campus to Blackstone.

The bargain price and the location in the district with San Francisco’s lowest office vacancy rate made it feel like a safe bet, said Gaw, chairman of Gaw Capital Partners, a Hong Kong-based property firm.

“I’m sure people think I’m an idiot,” he said. “But it’s Jackson Square, low rise, facing a park.”

Visa offices

Visa’s new digs are in a 13-floor tower that’s the centerpiece of the new $1.5 billion Mission Rock development.

Designed to woo people back to the office, the new building faces a waterfront park, a white-sand beach and the baseball stadium. Common areas overlook the team’s home field, while an outdoor observation deck features couches and a fire pit.

“People have lived in San Francisco their whole lives and never seen a view of the city from this angle before,” Herb Canada, senior director of investments for the San Francisco Giants, Mission Rock’s co-developer with Tishman Speyer and the Port of San Francisco, said ahead of the project’s June 6 ribbon cutting.

In spite of its trials, San Francisco hasn’t lost its flair for throwing a party. Last weekend, superstar DJ Skrillex held a concert for 25,000 fans, including Mayor London Breed, on Civic Center Plaza in front of City Hall, a location that had become known for drug dealing. Tickets sold out in an hour.

In Chinatown, new night markets featuring outdoor food stalls, music and dancing under traditional red lanterns are drawing crowds to a neighborhood hard hit by the pandemic and a wave of anti-Asian hate crimes.

Launched during last year’s Asia-Pacific Economic Cooperation summit to welcome international dignitaries, the concept proved so popular that it’s now a monthly affair. Merchants struggling to recover make as much as $10,000 per event and are hiring new workers, said Lily Lo, co-founder of BeChinatown, the event organizer.

“I never expected food to sell out in an hour,” she said in an interview. “We are seeing lots of young people and people from all over the Bay Area. This is really bringing new life to Chinatown.”

Manny Yekutiel, a community activist who helped fund the night markets, has raised $10 million from private and corporate donors including Michael Moritz, Chris Larsen, Salesforce Inc., Gap Inc. and Levi Strauss & Co. to stage street activities in neighborhoods throughout the city.

At a First Thursday street party in the financial district last month, Yekutiel said organizers planned for 10,000 people, but gave up counting at 15,000 after their clickers broke.

“The vibe is electric,” Yekutiel said. “People love this city and we’ve had a ton of negative press. There is a renewed interest in showing up. People are so ready for this.”

(With assistance from Sam Hall.)


©2024 Bloomberg L.P. Visit bloomberg.com. Distributed by Tribune Content Agency, LLC.

 

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