How the Exodus from NYC and SF is Creating CRE Investment Opportunities

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Escape from New York, the 1980s science fiction action film starring Kurt Russell, was set in the not-too-distant future. Residents and businesses had fled NYC for the suburbs, and Manhattan was turned into a giant maximum security prison. 

With so many apocalyptical headlines today about the mass exodus from NYC and San Francisco, it’s easy to believe these two gateway cities on the east and west coast are transforming into veritable wastelands before our very eyes. However, as commercial real estate investors know, there’s a big difference between fact and fiction. 

This article will take a closer look at what’s really happening in these metropolitan titans and the potential investment opportunities in the New York City commercial real estate and San Francisco commercial real estate markets. 

Taking Natural Disasters in Stride

Both New York City and San Francisco are no strangers to natural disasters. 

The Great Fire of 1835, the 9/11 attacks, and Hurricane Sandy dramatically altered NYC. 

Now, New York is a safer place because of them. San Francisco survived the Great 1906 Earthquake and the Loma Prieta Earthquake of 1989. Today, SF has some of the most stringent building and zoning codes to protect residents, businesses, and commercial real estate investors.

Despite what seemed to be insurmountable obstacles at the time, both NYC and SF overcame these obstacles to become better places to live and invest. History suggests that the current recession caused in reaction to the pandemic will be no different. 

The effects of COVID-19 may linger, and economic recovery may take longer than expected. But the rebound in New York City and San Francisco commercial real estate for sale will likely come quicker than many people expect. Tenants will find lower rents in prime locations, and hotel and retail revenues will swell from pent-up demand.

Short-Term Pain, Long-Term Gain

There’s no doubt that the short-term outlook for commercial real estate in New York City and San Francisco could be much better. Vacancies are on the rise, and asking rents are on the decline. 

However, investors and lenders view these short-term pains as rare opportunities to buy prime commercial real estate in New York City and San Francisco in strategic locations thanks to both markets’ long-term strengths.

To understand what these well-capitalized investors see, it helps to know how the commercial real estate markets in NYC and SF reacted during and after the Global Financial Crisis of 2008 – 2009.

New York City commercial real estate performance

Back in 2009, there were 200 investment sales in Manhattan. That’s nearly the exact number of sales that 2020 will see on an annualized basis. 

Over the next three years, between 2009 and 2012, sales transactions in NYC skyrocketed to over 900 deals representing a total sales volume of more than $50 billion, about a five-fold increase over three years alone.

As investors know, past performance is no guarantee of future performance. With that in mind, it appears that plenty of smart money believes that recovery in New York City commercial real estate for sale will be similar to what occurred after 2008, especially if interest rates stay at all-time lows.

San Francisco commercial real estate performance

San Francisco’s commercial real estate market witnessed a similar recovery immediately following the last financial crisis. In 2009, investment sales volume totaled about $3 billion with property changing hands at roughly $160 per square foot.

Over the next ten years, the commercial real estate market in San Francisco witnessed year-after-year steady gains. By mid-2019, sales volume exceeded $16 billion, with buildings trading for $450 per square foot on average.

The long-term effects of the pandemic on the San Francisco commercial real estate market are not yet known. However, many commercial real estate experts believe the SF’s market recovery could be just as dramatic as it was following the Global Financial Crisis of 2008 – 2009.

Big Deals Are Still Getting Done

Even as people appear to be fleeing big cities for the suburbs, commercial real estate investors are moving in the opposite direction. A quick look at some of the recent commercial real estate transactions in New York City and San Francisco reveal how much capital is being deployed:

NYC recent CRE deals

  • Facebook leased 730,000 SF of space in the Garment District
  • NBC Universal extended the lease for 339,833 SF of space in Rockefeller Center
  • BNP Financial Services renewed its lease for 322,586 square feet in Rockefeller Center
  • Nine multifamily/mixed-use properties changed hands for a total of $121 million
  • One office buildings transaction and three office condo deals generated $847 million in total

SF recent CRE deals

  • OpenAI leased 96,700 SF in the Showplace Square submarket
  • IBM leased 53,000 SF in the South Financial submarket
  • Chubb Insurance leased 24,000 SF in the North Financial submarket
  • Two office buildings in the SOMA and Mid-Market submarkets traded for over $192 million total
  • Two retail properties in the Mid-Market and Southern City submarkets changed hands for a total of nearly $8 million

Why Urban Centers Are Bouncing Back

One of the reasons why investors are buying commercial real estate for sale in New York City and San Francisco is that the pandemic is pushing young people and businesses into more affordable urban areas while pulling families to the suburbs.

Since 2010, the “youthification” of major metro areas has seen college-educated millennials between 25 and 34 generate about 50% of the population increases near Central Business Districts. 

Interestingly, the same trend occurred in the wake of the Spanish Flu, with young people willing to accept the short-term risks of living in urban areas in exchange for long-term economic opportunities.

While families may be fleeing to the suburbs, key industries continue to cluster in key urban commercial real estate markets such as New York City and San Francisco. Even with the option of working from home and hub-and-spoke office models, people will still work for companies headquartered in gateway cities. 

As the pandemic runs its course and the economy begins to recover, world-class cities like New York and San Francisco could very well end up solidifying their positions as technology hubs while offering unparalleled opportunities for commercial real estate investors.

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Shanti Ryle
Shanti Ryle

Content Marketing Manager

Shanti leads Crexi's content marketing strategies with 7+ years of content development experience, creating everything from blog posts to award-winning podcasts. Previously, she worked on content teams at Snapchat, Weedmaps, and HopSkipDrive as well as developed copy, articles, and media for freelance publications.

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