— By Dustin Dolby, executive vice president, Colliers —
During the second quarter of 2024, the San Francisco multifamily market endured high interest rates and delayed cuts. Between June and December of 2023, expectations of the Federal Reserve cutting rates spurred an increase in transactional activity following an apparent lull in the first quarter of 2023 as interest rates remained elevated. This two-peat of complacent transactions can be attributed to the looming decision concerning interest rate trajectories and its projections. Upon reaching the second quarter of 2024, we have yet to see any such cuts applied. This — along with the Federal Reserve’s consistent reluctance to cut — has resulted in a plateau of transactional volume within the San Francisco multifamily market.
Development within the San Francisco submarket has faced similar stagnation. However, this can be attributed to a lengthy “shot clock” that new developments face regarding the city approval process. Because of this, projects that focus on a large percentage of affordable units have been streamlined and comprise the bulk of new developments in the market.
If the Federal Reserve lowers interest rates by the end of the third or fourth quarter of this year — as anticipated in its current agenda — we expect an increase in sales transaction volume. Lower rates would expand the pool of qualified buyers in the market, creating a favorable shift in pricing for sellers and leading to more buildings being transacted.
The current landscape regarding acquisitions in San Francisco’s multifamily market has been plagued by high interest rates and complacency in moving capital. If available to exercise the option to use low-cost or minimal leverage in the acquisition process, the waning window of pricing haircuts when compared to 2021 and 2022 presents a considerable opportunity for asset appreciation. With interest rate cuts on the horizon, property owners both institutional and individual are beginning to see more buyers enter the market. This has significantly impacted a pricing resurgence and what some market players identify as a rebounding phase.
San Francisco’s multifamily market has become a buyer’s market largely due to the impact of higher interest rates. As borrowing costs have risen, the feasibility of using leverage to acquire properties has diminished, making it more challenging for investors to finance deals. This shift has significantly reduced the buyer pool as fewer investors are willing or able to secure financing at these higher rates. Consequently, property values have been driven down as sellers are forced to lower prices to attract the smaller pool of potential buyers.
Some investors are capitalizing on the market’s downturn by repurchasing assets they previously sold at peak values. A notable example is Gaw Capital, which recently repurchased a significant San Francisco office complex for $82 million, a fraction of the $245 million it sold for in 2018. This transaction highlights the current opportunities in the market — where properties are being bought back at substantial discounts due to the steep decline in real estate values since the pandemic.
Looking strictly at sales volume by district, we see have seen the most transactions within Inner Mission (nine), Eureka Valley (six) and Russian Hill (six). These submarkets have presented a significant opportunity for investors due to their relative affordability compared to peak prices from two to three years ago. The decreased prices in these desirable neighborhoods, coupled with strong sales volume, indicate that they are now offering considerable value. Inner Mission, Eureka Valley and Russian Hill are particularly attractive as they provide a chance to invest in prime locations at a discounted rate, potentially leading to substantial returns as the market recovers.