In San Francisco’s financial district, the One Montgomery building stands as a symbol of the city’s shifting fortunes. Once evoking the opulence of America’s Gilded Age with its Tuscan columns and marble staircases, it now reflects the challenges faced by the city post-pandemic. Ghazi Shami, CEO of the record label Empire, purchased the property in January for $22.5 million, a staggering 70% decrease from its selling price just six years prior.
Growing up in San Francisco, Ghazi reminisces about depositing coins from his family’s laundromat at a nearby Crocker Bank branch. Founding Empire in his hometown, he sees the purchase of One Montgomery as a generational market opportunity. “I could have easily picked up, planted the flag in LA or New York, where there’s a fervent music scene,” he states. “I was interested in being an entrepreneur that invested in my city.”
Ghazi is not alone; he represents a new wave of ultra-wealthy investors who see potential in San Francisco’s struggling commercial real estate market. After previously thriving due to the tech boom, the city has faced significant challenges in rebounding from the Covid-19 pandemic. However, local entrepreneurs and business leaders are now acting to spur a revitalization and capitalize on the depressed property values.
High-profile figures have already joined this movement. Jony Ive, the former Apple executive, has invested over $100 million in properties in Jackson Square, while Stephen Curry, star of the Golden State Warriors, purchased a nearby building for his business, Thirty Ink. Sergey Brin, co-founder of Google, made a strategic real estate move by buying out a $55 million loan for an apartment building while its valuation was halved by city tax appraisers.
More discreetly, Neil Mehta of Greenoaks Capital has been backing numerous LLCs that have acquired buildings on Fillmore Street in Pacific Heights. Venture capitalist David Sacks is involved in local development projects through the Brick & Timber Collective. Their combined efforts showcase the wealth amassed in a city that ranks fifth worldwide in the number of billionaires tracked by the Bloomberg Billionaires Index.
In the midst of a precarious economic landscape, only those with ample resources and strong conviction in San Francisco’s potential can afford the risk of waiting for recovery. “At the bottom of a cycle, it’s usually high net worths who jump in first, because the math doesn’t make sense,” explains Christopher Roeder, a real estate broker at Jones Lang LaSalle. “You’re throwing your spreadsheets out the window.”
The challenges in San Francisco’s real estate market have been exacerbated since the pandemic, leading to a population decline of over 6% from 2020-2021. As workers across the country returned to their offices post-Covid, San Francisco’s recovery lagged, resulting in office vacancies skyrocketing from less than 4% in 2019 to nearly 37% by the end of the last year, surpassing other major US hubs such as Manhattan and Chicago.
The city now grapples with an $800 million budget deficit as Mayor Daniel Lurie seeks to increase spending on policing and cleanup initiatives. Elected in November, Lurie aims to galvanize investment from wealthy residents and business leaders to address the city’s challenges. •
Early signs of recovery are emerging, with improved cleanliness and busier streets notable. City Hall’s proactive measures against drug-related activities and enforced return-to-office mandates for government employees suggest positive change. Additionally, the recent AI boom has encouraged tech workers to return to the area, further fueling optimism.
In the fourth quarter, San Francisco witnessed more office space leased than vacated for the first time since 2020. Billionaire Greg Flynn, who has a reputation for real estate timing, believes that the turnaround is already underway in the city. “I think that’s happening right now. It’s well underway, and it’s moving at lightning speed,” he asserts.
Flynn, a veteran of the ups and downs of San Francisco’s market, highlights the importance of timing in real estate investments. He has participated in various projects, including the purchase of the Huntington Hotel, sold for around 70% less than its assessed value. Flynn’s observation reflects the broader sentiment concerning the city’s cyclical nature of booms and busts, significantly influenced by the tech industry’s rapid growth over recent decades.
San Francisco’s tech industry has been both a boon and a burden for its economy, contributing to rising income inequality and a deepening housing crisis. The onset of the pandemic in March 2020 catalyzed an exodus from the city, emptying office spaces and leading major firms to adopt flexible work policies. Social issues worsened, with rising homelessness and public safety concerns drawing national media attention.
This situation contributed to the unsettling decline in real estate demand, which hit hard in San Francisco more than in many other locations. By 2020, central business district values had fallen by about 45%, according to MSCI Inc.’s commercial property price index. In the absence of significant investor activity, the extent of recent property value declines became difficult to gauge.
However, the San Francisco market began to experience thawing as a recovery became evident in 2023. A noteworthy transaction saw the Swig Co. acquire the old Union Bank property at 350 California St. for $205 per square foot, priced at a quarter of pre-pandemic evaluations. Property transactions have continued, albeit at marked discounts.
For instance, Gaw Capital Partners reacquired a trio of Jackson Square buildings for $82 million last year after having previously sold them to Blackstone Inc. for $245 million in 2018. Similarly, Hearst Corp. recently bought an office building for $47.5 million, roughly 47% below its last sale price.
In comparison to 2019 when 34 office sales occurred, only a fraction of transactions transpired last year, revealing a much shallower market for such deals. Investors who can self-finance their purchases or maintain flexible holding periods are more capable of weathering the prevailing uncertainty, while institutional buyers are often less willing to assume these risks.
As investors take advantage of bargain prices, others are motivated by a desire to invest in the revitalization of San Francisco. Jony Ive, who has long been connected to the city, is intent on restoring the Jackson Square area with his design studio LoveFrom. This endeavor represents a commitment to the city’s cultural legacy and creative spirit.
Amenities like restaurants and bars are envisioned for the space, alongside modern office environments that align with the area’s historic charm. The “Ive Hive” is being developed as part of these renovations, further enticing collaboration and innovation in the neighborhood.
The state of the office market remains challenging, as downtown vacancies continue to hover around 35.8% at the end of the first quarter. Furthermore, average asking rents are still significantly lower than pre-pandemic levels. Despite some properties, such as the Transamerica Pyramid, securing high rents, others find it difficult to attract tenants.
Local concerns have emerged regarding gentrification and displacement due to the influx of wealthy investors. As seen with Greenoaks’ Mehta, community backlash has prompted him to place acquired properties in a nonprofit foundation to ensure no personal profit is derived from the neighborhood projects.
Mayor Lurie, who comes from a history of philanthropy, sees potential in local investments from the business community as part of addressing various city problems, such as drug-related issues. He emphasizes the necessity of engagement and collaboration between the city’s wealthiest and its residents to ensure a balanced recovery.
The commitment of figures like Laurene Powell Jobs to support educational and artistic initiatives illustrates a growing trend of socially responsible investing. Additionally, initiatives promoting economic development in downtown showcase a collaborative spirit among stakeholders eager to rejuvenate San Francisco.
As these investments coalesce, there exists a hope for a balanced future wherein tech firms and local communities can coalesce for mutual benefit. For Ghazi Shami, acquiring One Montgomery is more than just a financial move; it represents a commitment to elevating the local art scene and enhancing his city’s cultural landscape.
As he envisions transforming the property into a vibrant headquarters, combining elements of sophistication with community engagement, he aims to signal a new era of collaboration in San Francisco. “If you’re looking at San Francisco as just an opportunity for a money play, then that’s the disposable behavior that got us to where we’re at now,” Ghazi concludes. “I’m hoping that as we have this uptick, we create a balance between tech…and some type of mixture of people that are looking for legacy and heritage.”
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