2023’s Winners and Losers

As we head into the end of 2023 and we have a good idea of how the real estate market went, here are our winners and losers for the year.

The single-family home market emerges as a winner as since the pandemic people prefer to move to a lower density environment and to not live in close proximity with others. Luxury homes were slow and prices did drop but homes under $2.5 million held their own in terms of pricing. 

One unforeseen benefit was that as mortgage interest rates increased throughout the year, currently hitting the 8% range, so buyers that could have purchased in the $3-4 million range had to lower their price point to qualify for a loan. They purchased less expensive homes instead on the west side of town, including the Richmond and Sunset districts; thus benefiting our market here.

The condo market was a loser, especially luxury condos and residences in the downtown, financial district and SOMA areas. This is a continuation of the pandemic trend as people do not prefer to live in high-density areas and with remote work still prevalent, they do not need to live as close to work as before. So moving further away still makes sense, negatively impacting the condo market.

The 2-4 units market is also suffering from higher interest rates. In the past, many of these were sold to owner occupied purchasers who used the income from the rentals to offset their mortgages. But at an 8% interest rate, and with a $1 million mortgage, the monthly payment is over $7,000 per month. Richmond and Sunset duplexes are not able to rent out to even cover the portion of their own mortgage and thus buyers of the smaller properties are few and far between. Prices will have to decrease substantially to bring buyers back into this segment.

The 5+ units residential market also is getting hammered because of the high interest rates. Typical cap rates in the past, defined as net operating income assuming an all cash transaction divided by the purchase price, hovered between 4-4.5%. However, with bank CD’s at about 5% currently, investors are demanding cap rates at a much higher return for their investments, thus putting tremendous pricing pressure on the apartment market.

The biggest loser has to be commercial buildings. Several of them have gone back to the banks because commercial vacancies are up. Without rent payments and the inability to know when this will end, commercial buildings have been devalued substantially. We have seen properties selling at 25-50% from their peak values a few years ago. Buyers really need to believe that San Francisco will come back and have to spend a lot of money to renovate and attract businesses that will rent the spaces.

Tenants are winners in this market as rents have gone down since the pandemic and rents appear to have stabilized. Because interest rates have gone up some tenants continue to rent. Commercial tenants have their pick of what space to rent and at much lower rents than before.

Lenders are big losers as they have no more refinances and real estate sales are down. Some lenders have laid off some of their loan agents. Banks that have held onto the mortgages in their portfolios are realizing losses on the money they loaned out previously. Foreclosures are starting to tick up which will hurt their bottom line some more.

Buyers who purchased the last few years have seen their property values drop but were able to lock-in at lower interest rates. They might not be able to qualify for a loan in today’s market and might have a higher monthly payment even if they could afford it. So some benefitted and some did not.

As you can see, even within real estate, certain investments do better than others. It has always been this way. Is the bottom near? I would think we are getting close if we are not there already. 

I recommend buyers and sellers consult a CPA, tax attorney and Realtor for insights before moving forward.

John M. Lee specializes in Richmond and Sunset District real estate. For real estate questions, call 415-465-0505, email john.lee@compass.com.