“Market is on Edge”: US Commercial Real Estate Bubble Pops, San Francisco Braces for Brutal Dive

“The bottom has not entirely fallen out of demand, though.”

Commercial real estate has experienced a dizzying price boom since the Financial Crisis. It goes in cycles. Rising rents and soaring property prices along with cheap credit drive up construction, which takes years from planning to completion, and suddenly all this capacity is coming on the market just as demand begins to sag…. That’s when the cycle turns south.

On a nationwide basis, the boom has been majestic. But now, after posting “nearly double-digit gains for each of the past few years,” according to Green Street’s just released Commercial Property Price Index (CPPI) report, “property appreciation has come to a halt.”

The index was essentially unchanged in April from March – actually microscopically down for the third month in a row, after having soared 23% past its prior crazy-bubble peak of 2007.

While there is “no evidence” that prices of Class A properties have fallen, prices of Class B properties “are probably lower than they were at the start of this year,” the report explained.

And this is what the boom-and-bust cycle of commercial real estate looks like, according to the CPPI, which tracks the value of “institutional-quality” apartment, industrial, mall, office, and strip-retail properties. Note how there are no “plateaus” in these cycles:


Real estate is local, and each sector has its own dynamics. In some cities, the office sector is still booming. In others, it has hit a wall, as in Houston which faces a billowing office glut, soaring subleases, collapsing lease volume, and hefty discounts on rents [read…  Houston Office Market Melts Down].

Then there’s San Francisco. Boston Properties, the largest office landlord in the city, already warned of the cooling market in its earnings call. It owns, among others, the 1.4 million sq-ft Salesforce Tower, the tallest building in the city, to be completed by early 2018. It’s just one of the numerous developments in a historic construction boom visible to anyone trying to drive down the congested streets blocked with construction equipment in certain parts of SF. For the moment it’s 59% leased.

San Francisco has been through a boom in tech. “Tech” includes categories like “food tech” (app-based home-delivery service), bio tech, ad tech, fin tech, social media (like our darling Twitter), etc. Companies brought in lots of people that needed a place to work. That boom is dependent on a flood of money from around the world, a soaring stock market, and an IPO miracle.

Alas, the stock market is mired down and IPOs – there were no tech IPOs at all in the first quarter – are in the worst condition since the Financial Crisis.

Startup funding is drying up. Startups are shutting down, one after the other. And larger companies, such as Twitter, or Yahoo and GoPro a little further afield, are laying off people. The whole paradigm has changed just when a historic office construction boom is playing out.

Colin Scanlon, Research Manager at commercial real estate services firm Savills Studley, put it this way:

“San Francisco’s economy and office market have been at the forefront of major metro areas in the last five years, registering some of the most impressive hiring and leasing trends in the country. Now they may be leading the way in terms of correction as sublet space soars and tenants pull back.”

On the surface, the office market still looked OK-ish in the first quarter. Overall vacant availability, which had edged up to 8.0% in Q4, the first increase since 2009, edged back down to 7.7%, according to Savills Studley. Class A vacant availability, after “spiking” 0.8 percentage points in Q4 to 8.5%, remained flat. Overall asking rents inched up 0.2% for the quarter and rose 7.9% year-over-year. Class A asking rent ($65.53 a square foot!!) fell 0.6% from the prior quarter.

But leasing activity for the past four quarters plunged 36.7% to 5.5 million square feet. And this is occurring as numerous office towers are under construction and nearing completion. The report:

More companies are proceeding cautiously and some deals are falling apart. Decision-makers on the tenant side are getting cold feet, especially when growth is involved. The bottom has not entirely fallen out of demand, though. Law firms and financial companies are still getting ahead of the decision, with some firms trading spaces or moving instead of renewing.

Landlords started adjusting their strategy several quarters ago, increasing security deposit and collateral requirements for less established companies. Creditworthiness trumps the highest bidder for many owners, but others are very eager to lock in tenants before rents really start sliding.

And this:

People fear that all it will take is a couple of big tech companies folding and the floodgates will open, causing the sublease market to blow up, rents to drop, and new construction to grind to a halt.

Now the “common sentiment” is that rents peaked. “The market is on edge.” The next step is south.

San Francisco has been through this before. Demand for office space in the city doesn’t flatten. It booms as companies, tangled up in their own hype, try to “warehouse” office space for future growth as they perceive to be an office shortage. When reality sets in, they try to sublease the vacant space, and supply soars just when an enormous amount of new construction is being completed, and just when demand crashes, dragging rents and property values with it.

Now the hope is that this time, it won’t be like 1999 or 2007. The optimists – “the more positive consensus view,” as the report says – cling to the idea that this time it’s different, that this time, “market fundamentals (both in the broader tech sector and the office market) are stronger than they were in 1999 or 2007.”

The periods that followed those two years were devastating to the SF office market.

That fundamentals are stronger than last time is what everyone said in 2007, just before the crash. The stock market is still near its all-time high. Optimism and hope still reign. The downturn in the “tech sector” hasn’t really started yet beyond the first baby steps.

But already, there’s the nightmare of funding “down rounds,” or worse, of no more funding rounds at all for some startups. There are now bankruptcies in the startup world, and cost cuts and layoffs to stem the bleeding and live another day. And this is how a classic commercial real estate bust in SF starts out.

But the problems that San Francisco faces are popping up elsewhere, as the “credit cycle” begins to unravel. Read…  US Commercial Bankruptcies Skyrocket

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  51 comments for ““Market is on Edge”: US Commercial Real Estate Bubble Pops, San Francisco Braces for Brutal Dive

  1. Ptb says:

    whats the inventory look like in SF? That’s the real tell.

    • Toddy says:

      Nah. The real tell is how long is the lunchtime line at the Working Girls sandwich shop next to the Yelp offices.

      Still going strong for now.

      • NotSoSure says:

        Agreed. Restaurants, etc are still filled to the brim. Today the queue’s out the door at a place I usually get my breakfast burrito from. Heck the queue gets longer every day.

        Money’s overflowing in this city.

        • Wolf Richter says:

          I this cycle, the first person among my friends got canned a few of weeks ago – marketing guy at a tech company (maturing startup). He wasn’t the only one who got canned at the company. CEO got canned too. Plus others.

          My barber told me that he is the last one to feel the problem … because people will get their hair cut to look good for interviews etc. But when he feels it that’s when they start leaving SF because it’s too expensive to live here without a job, and they’ve given up hope of finding a job in the area, and they’re heading home. So he hasn’t seen any impact yet.

          The street he’s on was crowded with young shoppers when I went there mid-afternoon.

        • Bigfoot says:

          I love the real world observations y’all post. I think they are often more informative than the print. Keep em coming!

        • becky says:

          Agreed. I live in the mission. Things appeared to be slowing in February and some people got worried, but now everything feels back to normal. Normal meaning insanity in terms of throngs of millennials waiting for their tech buses on valencia street, construction everywhere, packed restaurants, packed Bart, traffic at all hours, etc., etc. I was here for the past two bust cycles and it won’t last.

  2. ke says:

    Tech is anything but contained. High wage guys filling the laundromat isn’t a good sign for anyone. And who is going to pay that 29% credit card debt to cover all the defaults, just to do it all again.

    Watching Trump play with GS debt as credit should be interesting, for minute.

    • EVENT HORIZON says:

      Trump had no problem filing bankruptcy a few times. If we are lucky, he will file bankruptcy for the entire country.

      Take that China bond holders.

      • ke says:

        That’s exactly what he plans to do, just like Japan before that. Whether he can get Americans to do any real work to replace trade, while he’s being careful with low rates on a sunk cost petrodollar with no effective replacement, is the trick. Doable, but he has no idea how.

        • Frank says:

          There are always geniuses like you guys that don’t understand the consequences of what you are saying and what you are asking for.

        • Bigfoot says:



        • ke says:

          Sorry. End of reply line, so it’s here. You’ve got a co2, o2/o3 concentration problem due to destruction of photosynthesis from the ports out, to maintain artificial RE inflation and keep the actuarial ponzi going. The answer is in the problem as always.

          The answer to how you get professionals with degrees in make work and their programmers to pick grapes was provided by Pavlov, in reverse.

          Ps. As a German, I am quite familiar with how Hitler came to power. In Austria.

      • Bigfoot says:

        Trump has never filed personal bankruptcy, but 4 of his businesses have. Big difference. I’m not a Trump fan BTW.

        “If we are lucky, he will file bankruptcy for the entire country. Take that China bond holders.” —–Seriously?

        Please explain the process for me, I just got up out of my thatched hut & I’m trying to understand how this works.

        • Agnes says:

          Bigfoot…see wikipedia about Continentals and Greenbacks to see an example of the process. My Grandmother, who was a proper lady, had been trained not to say “Damn” (because it means ‘be separated from God forever’), so she would say “its not worth a Continental”.

        • Bigfoot says:


          Thanks for chiming in. I’m pretty familiar with monetary history (no expert) and I understand how Lincoln funded the war, how various banking houses were conspiring against him & so forth. Colonial script, check, tally sticks, check, greenbacks, check etc. I’ve studied it back to how various ancient peoples accounted for their labor & production & what has been used as a store of value. It’s a very interesting subject.

          However, this gives no explanation of how we get there from here. (honest money versus cartel fiat) It’s not a simple affair. Insinuating we will (should) nuke china, the prez is going to get Americans to do real work to replace trade while he’s careful with rates?? So the president will launch the nukes, become the labor & finance minister, & this is what we need & is doable? I should have stuck to a 1 sentence reply like Frank. Off to pick some berries now.

        • d'Cynic says:

          In my view and personal experience, few people really like Trump, but then comes the second thought: anything but such useless bunch like the established parties. Where does it leave you?

      • d says:

        What happened to Russia when the USSR collapsed.

        Is nothing.

        Compared to what will happen to the US if trump declares, not paying. The US $ will be toilet paper, instantly, and no longer the global reserve currency.

        As a country with a massive trade deficit that imports a lot of food, you will have a big problem and nobody will want to buy anything you have as they dont like you.

        And they no longer need to do business with you.


        The french did that 30 years ago and they still cant sell diddly in Australiasia, the western pacific, and Se Asia.

        The Australian submarine deal is afar from a done deal, as there is an election, different government, deal dead.

        The US is not liked, the second you loose that reserve status, you will start to see, how much.

        • Agnes says:

          d I went and checked about feeding ourselves in the U.S. and also what we export:

          “Nearly two-thirds of U.S. agricultural imports consist of horticultural and tropical products
          Over 44 percent of U.S. agricultural imports are horticultural products—fruits, vegetables, tree nuts, wine, essential oils, nursery stock, cut flowers, and hops. Sugar and tropical products such as coffee, cocoa, and rubber comprised just over 20 percent of agricultural imports in 2015. Imports of vegetable oils, processed grain products, red meat, and dairy products have grown significantly in recent years.”(about110$Billion total)

          “The value of U.S. agricultural exports declined in 2015, reversing 5 consecutive years of export growth. Since 2000, developing countries—led by China—had been the main drivers of U.S. export gains. Horticultural exports were the only product group to grow in 2015, up about $266 million, which increased its share of total U.S. agricultural exports to about 25 percent. In fact, horticultural products became the largest share of any group, surpassing livestock products, grains/feeds, and oilseed/products, which had combined losses in 2015 that accounted for nearly all of the decreases in export values.” (about130Billion$ total) My feeling is that as soon as we start labeling our foods as GMO or not, more people would accept them.

          Yes I like my mochas and yes I am accumulating them…but I think we are still feeding ourselves as long as the EPA is kept on a leash.

          Bigfoot –Oh. You meant How do we go in the Other direction, and is it doable, sorry I misunderstood. Having been called Chicken Little, Cassandra, and Noah by members of my family, I have no fear to tell perfect strangers No…I think it is too late. But I think that junks will still go up and down the Yangtze, as during the Opium wars. There will still be commerce. That is, I hope we will have a catastrophic collapse rather than being chipped. :) Cheerful, ain’t I? I pray over it.

        • Bigfoot says:

          Agnes –

          Check out this infographic regarding 10 large food companies & the brands they control. Choice = illusion? https://chdexpert.wordpress.com/2014/01/30/infographic-of-the-worlds-10-biggest-food-companies/

          Support your local farmer! Make as many local connections as possible. It could be important in the years to come. I agree with you, as long as there are people, there will be commerce.

      • Dollars in Chinese hands are already flowing toward Uncle Sam … it is China that is bankrupt along with the US.

        All felt there was something for nothing out there not realizing that nothing is indeed … nothing.

  3. OutLookingIn says:

    Ground shaking tremors begin in Asset Backed Securities. ABS
    What are ABS? In one word – DERIVATIVES

    What are these ABS composed of? One of the chief components of these “financial weapons of mass destruction” are, commercial mortgages.
    Or put another way by Wall street – CMBS – Commercial Mortgage Backed Securities. Or their complete Wall street description – OTC/CMBS
    Over the Counter Commercial Mortgage Backed Securities

    Who bought these financial “products”?
    1/ Hedge Funds
    2/ Pensions
    3/ Insurance Companies
    4/ Sovereign Wealth Funds
    5/ Banks

    These financial “products” have been traded far and wide around the globe. They have been used as “collateral” to lever other “loans” and financial obligations to third and fourth parties! This inter-connected “chain-of-madness” weaves it’s way throughout the global financial sector. Some hedge funds recently have been feeling the pain, along with some insurance companies (health care) withdrawing.

    A chain is only as strong as it’s weakest link. Break that link and its all over except the wailing and gnashing of teeth!
    But then again, what could go wrong? Right?

    • EVENT HORIZON says:

      So what.

    • Agnes says:

      Well-timed post Out-lookingIn …the teamsters pension fund is in trouble, and it isn’t all corruption…with interest rates artificially kept low, their mix of risk (being quite old) was bound to come to grief…but no posters in the comments there seemed aware of that aspect. I just wonder what will happen when the same thing happens to the teachers and civil service pensions.

      • West says:

        I’ve brought up this pension saga a few times to those in my network, all receiving some sort of pension. The typical response “So what my pension is safe”. I generally reply “that’s what the Teamsters said a couple years ago”.

        Too many people don’t realize just what a precarious position we are in because of asset bubbles and the resulting low interest rates. it’s the medicine that has become the poison.

      • OutLookingIn says:

        Agnes, Treasury has announced that there will be NO reduction of pension benefits or re-numeration of pensioners payments.

        This is nothing more than kicking the can, since according to the pension fund itself, it will be non-viable in 10 years or less.

        As it stands, the pension funds are sitting on an asset piles of crap, with no coupon and negative rates of return.

        • d says:

          “As it stands, the pension funds are sitting on an asset piles of crap, with no coupon and negative rates of return.”

          The sad and probably frustrating thing for many, is that those funds, have been milked, underfunded, and and malinvested, by the leftists administrators, who claim to be supporting the workers/beneficiary.

          Leftist state administrations, Leftist State unions, Leftist pension fund administrators, underfunded pension plan with poor returns.

          Blame, THE GOP caused it, the leftist will all tell you..

        • Wolf Richter says:

          d, I think you’re too hung up on “leftists.” In this case, as in many other cases, the fact that these funds “have been milked, underfunded, and malinvested,” is a bi-partisan phenomenon that spreads across the political spectrum. Look at the pension fiascos in states that have long been held by conservative Republicans. Same thing. They’re ALL doing it.

        • d says:

          Yes, they are all doing it.

          How many unions are run by republican’s?

          The union administrators in America, let this happen, as they get paid to, sometimes by republican’s.


          In the current form of uneducated mob rule, claimed as a democracy.

          The left abuses its ability, to buy the mob majority of the electorate, to the long term detriment of the Country/Society.

          If this ability was removed from the left, perhaps the world would be a better place.

          Corporate money needs to be removed from politics.

          There is no point in doing this, or crying about corporate money in politics.

          Until the left, are prevented from ever again, buying the mob with untenable financial or social aid promises.

          The two elements are flip-sides of the same coin.

          Dont worry about the problem, or the result of it..

          Find the root cause of it, and resolve it, then the problem will go away.

          The root cause of our failing capitalist democracy’s.

          Is the ability of the left, to repeatedly buy the mob of the electorate, and overturn any policy’s brought in by non-leftist, that could in the long term improve the society. That do not fit, leftist, class warrior, tax the rich. Break up the banks, policy agendas.

          The end result of that is.

          Greece, it has a minuscule militant right, and very left, far left socialist, and center left, party’s. The center left in greece, are referred to as rightist. Hence the mess in greece.

          Just as the Ayatollahs in Tehran, hold up America and Israel, as the evils out to destroy them. Diverting the populations attention, from so much that they do wrong, and that is wrong.

          So the left, holds up wealthy people and banks, as the root of all evil, out to destroy them.

          Militants are frequently the cause of the problem.

          The leftist militants, are a far larger, and more dangerous group.

          In the history of our grandparents/parents country, the left diverged, into Communist, and National Socialist. Mainly due to the acts of outside forces.

          That took that country, and the world, to a very bad place.

          Stalin, Mao, DPRK, Hanoi, Venezuela. Adolf.

          A function left is a necessary element, of healthy democracy.

          Our western democracy’s are not healthy, and will remain unhealthy, until the ability of the left to buy the mob, is massively curtailed, if not eliminated.

          Hence yes, I have an Issue, with the major cause of the problem.

          The majority refuse to see.


  4. Intestinal Blockage says:

    Frisco is immune from economic downturn because of its reliance on tourism. SF is an international black hole vis a vis tourism, constantly, voraciously sucking in gobs of tourists from all across the globe on a daily basis.

    • Wolf Richter says:

      Did you miss the last crash? Tourists too stopped coming. And the crash before then? Or are you being ironic, and I missed it?

      BTW, tourists are not what drives the SF economy, though they add a nice flow of business for lodging and restaurants. About 90,000 people in SF are “supported by tourism,” whether or not they live here is another question, given the cost of housing. Many of these jobs are relatively low-paid jobs.

      San Francisco currently has 660,000 total employed (including people commuting in from other places). So those employed in the tourism trade make up about 14% of all employees. But the salaries for those working in tech, finance and many other jobs in SF are much higher.

      • Bigfoot says:

        Speaking about tourism, wrap your head around this number. There were 66,000,000 million visitors to Orlando last year. Happy to no longer live near there!


        • Wolf Richter says:

          OK, Orlando got us beat .. by a HUGE margin. That’s a staggering number.

          In SF, there were “only” 24.6 million visitors in 2015 (18.9 million leisure visitors and 5.8 million business travelers).

      • ML says:

        UK. I live in what has become a tourist town. Last year, I showed around two strangers, Americans from SF who were visiting to photograph a house where one of their ancestors lived in the 1890s. Anyhow, I agree. Tourism is the icing on the cake which would otherwise be tastless were it not for a thriving local economy to keep things going all year.

      • becky says:

        Right Wolf. And PS: Nobody here calls it Frisco.

  5. Bigfoot says:

    Here’s a bit of residential data from Florida through Feb 2016. Sorry, haven’t been able to find any good, free, commercial data. Overall, residential construction & sales seem to be holding up well in the cities. I’ve been seeing a fairly desperate search for competent help though & primarily for tradesman experienced with commercial construction. Like every state, there are numerous areas that are depressed so the stats can be a bit misleading.


    The second link has a lot more options to explore. If anyone knows where I can gather any FREE Florida commercial real estate stats, lay it on me please.

    • ke says:

      There are plenty of competent nonparticipating craftspeople. They just don’t work for falling living standards, which is all paper, digital and PM deliver.

      • ke says:

        Barter is alive and well, because no government in history has represented working people. Money is for discounting. That much Trump knows, all too well. SS is already useless, relative to those it was intended for, but not for those collecting multiple govt pensions.

        MAD has no exit, but it sells like hotcakes.

        Common sense gets lost in the artificial complexity.

        • Bigfoot says:

          Barter has always been alive & well. I live in the countryside, lots of people barter. The only problem with barter is it relies on a coincidence of wants. Common sense – a seemingly uncommon phenomenon regardless of complexity,

        • ke says:

          Mostly in needs here. San Fran and transplants suck everything dry for several hundred mile radius and heavily occupied by govt, because we are fortunate to have resources and memory of the great depression. No one here wants iPhone money or PM, the moneyed transplants roll over pretty quick, and potheads still have lots of cash. Dry powder is best for now. Overboard.

      • Bigfoot says:

        Craftspeople & others do what they need to survive & eat. I know scores of very talented people who are, have, or will work any type of job to get by. Everyone needs to eat. They will work versus not eating (unless the government supports them). I’m still not sure what your point is other than the monetary system has been hijacked & the economy is weakening. I certainly agree with that. I also agree we are destroying the planet. I still can’t make any sense out of your first post & you didn’t explain how the things you said could be done so I’ll let it go at that.


  6. Bigfoot says:

    Another link to Florida residential sales stats. This one is for condos & townhouses. Here’s some graphics & numbers that Petunia had talked about some time ago regarding the condos. The numbers aren’t pretty


  7. Old School says:

    “It booms as companies, tangled up in their own hype, try to “warehouse” office space for future growth as they perceive to be an office shortage.”

    This is interesting. Is residential real estate gobbled up based on the projections made by tech companies?

    If Yahoo (joke) projected it would hire 1000 programmers in the bay area in the next year, would Blackstone run out and buy up residential properties? Or was that only in the post-bust 2009 period?

  8. chris hauser says:

    ask yourself this: would you invest in the office buildings currently being constructed? at what price?

    off the top of my head, momentum divided by drag multiplied by fuel, aka, funds = current condition. when the drag gets bigger, the momentum number is less, and if the fuel is low or diluted, well, you know.

    if you paid too much, it”ll be that much the harder.

  9. Chicken says:

    Code words….. ?

    Service economy, bound to service debt for eternity?

  10. Mary says:

    SalesForce moving out of all its space splattered over downtown and into 2 new headquarters buildings will make an impact alone. Huge amounts of space shifting all at once and much of it Class A FiDi space that won’t be filled by start-ups.

Comments are closed.