Is San Francisco Punching Above Its Weight?

by | 31 May 2016

As a long-time resident of the Bay Area—almost 20 years on and off in San Francisco before decamping to Oakland a decade ago—I’m understandably proud of the economic progress the city and the region have made on many counts. Sure, San Francisco has long been known as “Everyone’s Favorite City” to visit, with a reputation for outstanding food, music, scenic beauty, and bohemian lifestyles. But as a place for business? Not so much.

That’s changed significantly in recent years, riding primarily on the strength of leading tech firms such as LinkedIn, Google, Apple, Yelp, Airbnb, and Twitter, among many others, as well as Salesforce, now the single largest tenant in San Francisco. In fact, tech has now displaced financial firms as the largest tenant sector in the “Financial District.”

Despite its reputation for left-wing, “anti-business” politics, in fact, investors view San Francisco quite positively as a great market. Last year consultant KPMG ranked San Francisco as the fourth most attractive city in the world for investment out of 25 major cities analyzed, behind only New York, London, and Shanghai and ahead of Paris and the other 20 metropolises, many of whom enjoy low-tax, “business-friendly” reputations.*  And A.T. Kearney ranked San Francisco as the top city out of 125 considered in its Global Cities Outlook for business potential.**

But here’s the kicker: The City by the Bay is far, far smaller than all of the cities with which it is routinely compared. With a population of just 850,000 residents, San Francisco has barely a third of the population of the next smallest city in the top five cities for investment (Paris) as ranked by KPMG, and less than 10 percent of the average city population on the list. Regional comparisons are similar.Top Cities

So what accounts for its attractiveness to investors, aside from, you know, the city’s famous scenic beauty? Certainly no city better embodies the importance of the “creative class” of workers as a driver of regional growth.  In the modern economy, firms’ location decisions are governed by access to well-educated creative workers, and tech prizes such workers more than any sector. So firms are drawn to the Bay Area due to its highly-educated work force, which in turn attracts investors.

This logic is inherently circular, for what draws these prized workers in the first place? Certainly San Francisco’s charms play a role, as do its world-class universities, led by UC Berkeley and Stanford. But another key factor is the entrepreneurial spirit of the Bay Area’s business community itself, which creates a so-called virtuous cycle, where workers come for the opportunities while firms are drawn by the access to the desired workers seeking the opportunities they provide.

Of course, one can’t ignore the proximity to Silicon Valley in enhancing San Francisco’s economic heft.  Palo Alto—the epicenter of Silicon Valley—is only 35 miles south, and San Jose, with serious tech and business chops of its own, and an even larger population than San Francisco, is just 50 miles south. Adding in the South Bay, the combined metro population swells to 6.7 million. But this is still far smaller than the other metros on the list, many of which likewise could be extended to incorporate adjacent metros, such as the New York – Philadelphia corridor, which is as densely populated along the New Jersey Turnpike as the greater Bay Area is along Highway 101.  More importantly, few investors—and even fewer residents or tourists—view San Jose and San Francisco interchangeably.  So it’s no stretch to say that San Francisco’s strength speaks for itself.

Property Investment

San Francisco’s appeal goes well beyond just tech and finance. It’s now also a top destination for commercial property investment, driven largely by its strong economy and outstanding business climate. And here again, San Francisco attracts attention far out of proportion to its size. The members of the Association of Foreign Investors in Real Estate (AFIRE), a group of major institutional investors, this year ranked San Francisco as the fifth best market in the world for property investment.*** Again, San Francisco’s size pales in comparison to the other leading cities.

Top Global Cities

And yet San Francisco not only ranks high in investor preferences, it also attracts a disproportionate share of investment dollars. Last year there were $34 billion of commercial property transactions in the Bay Area according to Real Capital Analytics (RCA). Though not nearly as much volume as in New York or London overall, San Francisco outpaces these and the other metros when adjusting for population size: Per capita transaction volume is almost twice as much as the next highest metro and nearly three times the average of the other top metros.

In these and other ways, San Francisco has truly emerged in this cycle as a world-class city, part of any discussion of top markets globally, despite its diminutive size. To its notoriety for beatniks and hippies, free love and gay rights, and free-thinking generally, one can add another less likely moniker: business powerhouse.

The Price of Success?

This rise in San Francisco’s status has come at a steep price. Housing here has gotten frightfully expensive, both to rent and to buy, while commercial real estate values and rents have also soared. Whether San Francisco really is the most expensive market in the country is more debatable, however, and depends not only on what data sources are used but also how different geographies are compared. I’ll explore this topic in a forthcoming blog. But for now, suffice it to say that there’s no doubt that property here has gotten extremely pricey.

Restrictive land use policies play a major role: San Francisco has added more than eight (!) times as many jobs (82,500) as housing units (9,600) in the four years through 2014. With an average household size of 2.26, that means a fourfold shortfall in housing units during this expansion even if every new resident holds a job.  [In the more likely case that not every new resident is working, San Francisco would need even more housing units to keep pace with the job growth.] So supply constraints are a key cause of skyrocketing housing costs.

But another factor that receives less attention is San Francisco’s small land area relative to its outsized reputation. The opportunities to purchase property here are limited for investors and residents alike. Even with the ongoing densification, the city’s small land mass, surrounded by water on three sides, presents a practical restriction on future growth that virtually ensures that investment opportunities will remain limited. Which perhaps makes the city all the more alluring.  Just another of San Francisco’s many charms—but one that could undermine its long-term growth and vitality if workers and their firms are priced out of the market.


* KPMG, Global Cities Investment Monitor 2015: New Rankings, Trends and Criteria.

** A.T. Kearney, Global Cities 2015: The Race Accelerates.

*** AFIRE, Annual Foreign Investment Survey, 2016


A version of this post originally appeared in

Andrew J. Nelson is Chief Economist for Colliers International in the United States. Based in San Francisco, he covers a mix of general economic topics as well as related issues that bear on the performance of property markets.