Has San Francisco Turned the Corner? Foodies Think So
If you're looking at the same data as everyone else, you'll think like everyone else
This time last year, the entire world was sure of one thing: San Francisco was dying.
And as the media was obsessing about this "Doom Loop," the people actually living in the city were busying doing something else:
Opening Businesses.
In particular, they were opening restaurants, bars, cafes and other businesses broadly categorized as "Food Services" by the bean counters in City Hall.
Meanwhile, institutional real estate investors were happy to redline San Francisco, as the value of apartment buildings and officer towers collapsed through much of 2022 and 2023.
And then a funny thing happened late last year: Prices stopped doing down.
No one really noticed until months later, but now in hindsight it’s clear that the bottom for San Francisco commercial real estate - at least for multifamily and office - is in.
How could we have seen this coming?
The answer lies in looking at data outside our insular world of commercial real estate, digging for gold where others aren't looking.
And on the surface, this data tell a pretty optimistic story about San Francisco.
After a totally justifiable collapse in business confidence during the pandemic, food entrepreneurs have seized on low retail rents to open new businesses.
2024 is on track to have more food services openings ever.
Let that sink in amidst the proclamations that San Francisco is going to fall into the Bay.
Which is good news for San Francisco property owners broadly, but real estate investing has evolved to where region or city-based theses can be beat out by highly localized bets on submarkets, neighborhoods or even individual streets.
So let's dig in a bit deeper to see which parts of the city are contributing most to this surge in economic activity.
The somewhat messy graph below shows businesses openings by year, by neighborhood in the Food Services sector.
Normalized to 2015 to adjust for neighborhood size, the trends that restauranteurs noticed and are investing in become clear.
Pre-Covid, SOMA, Hayes Valley and Mission Bay led the boom as tech workers flocked to these neighborhoods, while developers launched new projects targeting these high income earners.
Even the Tenderloin saw an influx in new hot spots, as young people sought out gritty bars and restaurants for happy hours and weekend bar hopping.
More traditional northern neighborhoods like North Beach and the Marina did just fine, but growth was more muted than the south side of town.
Zooming in post-pandemic, we can evaluate how these trends have changed since Covid decimated the city.
Neighborhoods like Hayes Valley and Mission Bay have seen consistent growth since 2021, continuing their pre-Covid trends, remaining strong in 2024 even as openings in other neighborhoods tapered off.
Meanwhile, in SOMA and the Financial District which were hit hard in a highly public way, after a flurry of new opening activity downtown in 2023, activity has been more muted thus far in 2024. Rising retail rents have slowed new openings a bit, even as high-profile departures around Union Square and along Market Street get all the press.
Notably, western neighborhoods are picking up steam, with the Richmond District in particular demand thanks to being relatively safe, close to Golden Gate Park and still relatively affordable.
So what does this data and this kind of analysis mean for apartment investors?
First, it helps us identify into which neighborhoods local businesspeople are investing, and as the most plugged-in people in any market, they are typically the first movers as a neighborhood becomes hot.
Second, data like this can also give us clues as to which neighborhoods are falling out of favor, perhaps offering a glimpse into a future of slower rent growth.
Third and more globally, understanding these trends at the neighborhood level gives us confidence that even though San Francisco has been largely left for dead by “smart money” capital allocators, local small businesses entrepreneurs are actively reinvesting back into certain neighborhoods.
They must see something that the market is missing.
I know who I’ll bet on to be ahead of the curve.