Disagreement over San Francisco’s real estate investment prospects prompt concerns for investors. Is San Francisco a good investment for its astronomical demand, or is it a bad investment due to excessive prices for both residential and commercial property?

San Francisco and other large California cities, like Los Angeles, are “dangerous to the investor,” according to Forbes’ analysis of the best investments of 2016. High prices for single-family residences (SFRs) and lagging multifamily construction starts deter these investors, foreshadowing low returns on dramatically expensive investments.

Their concerns are well justified by current housing conditions in the Bay Area. Multifamily construction starts decreased 5% from May 2015 to May 2016. San Francisco home prices across the low, middle and top tiers increased 13%, 9% and 7% respectively from Q1 2015 to Q1 2016. Demand for housing in the Silicon Valley shows no sign of slowing despite lack of inventory, although home sales volume suffered a brief dip in early May 2016.

In spite of the above, a handful of gutsy investors continue buying Bay Area properties, mostly commercial sites. An analysis on GlobeSt.com, the online commercial news source for ALM Real Estate Media, outlines the city’s investment potential by comparing it favorably to global investment leaders. For example, San Francisco has been ranked globally as:

  • the fourth top city for investment in the Global Cities Investment Monitor 2015 by Paris-based investment agency KPMG;
  • the top city for business potential in the Global Cities Outlook 2015 and 2016 by international management firm A.T. Kearney; and
  • fifth best for commercial property investment by the Association of Investors in Foreign Real Estate (AFIRE).

These rankings are supported by the strong presence of foreign investors in Bay Area real estate, despite expectations of a significant decrease in foreign investment due to global economic turmoil — an issue perhaps more relevant following the cultural shock of Brexit.

These investors willing to take on the risks that deter others see potential in the Bay Area’s thriving tech industry and employment recovery. San Francisco’s job market quickly recovered from the Great Recession and financial crisis, catapulting per capita income for tech employees and other top earners able to purchase homes with record-high prices.
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So, is Bay Area investment safe?

For the time being, investment in San Francisco real estate is risky due to the very low rate of return. Although residential property investment seems alluring (who doesn’t want a cut of those atrociously high rents?), high-cost housing drives buyers and renters out of the city with each uptick in price. When the lack of housing supply causes the exodus of working residents, businesses struggle to maintain workforce and income — threatening commercial property investment, as well.

Additionally, current housing conditions harken back to the surge of Japanese investors in California real estate in the ‘80s and early ‘90s. Japanese investors pumped billions into major California real estate markets — Los Angeles and San Diego, specifically. However, when the then-powerful yen succumbed to Japan’s economic collapse, investors pulled out of California en masse in 1991, sinking the Japanese investment rate by 83% statewide.

Likewise, although foreign investors in San Francisco real estate are currently holding steady, the city isn’t impervious to fallout. Japanese investors affected by the aforementioned crisis reduced investments in San Francisco real estate by 74% — a possible side effect of overeager investment in bloated urban markets today. If precarious foreign markets (such as in China) crack under pressure as they may well do, foreign investors will likely retreat, taking their invested funds with them and subsequently devaluing California real estate once more.

Agents, how do you advise clients interested in investing in San Francisco real estate? Sound off in the comments below.