REAL ESTATE NEWS

The San Francisco multifamily market continues to present compelling below-replacement-cost opportunities. In many cases, desirable apartment buildings requiring little to no renovation are trading at 30% to 50% below replacement cost, with broader valuations still significantly below prior cycle highs, according to real estate investment firm GTIS Partners.

At the same time, fundamentals are beginning to improve, with rents showing signs of stabilization and operating expenses, including insurance costs, moderating across many markets.

GTIS sees this as an attractive opportunity to acquire high-quality assets at meaningful discounts in markets positioned for long-term recovery.

San Francisco's multifamily market has entered 2026 following a strong improvement in vacancy last year, which fell by triple digits. That came while the city's role in AI and tech innovation has helped reinforce high-income renter demand.

At the same time, investors are seeing a more constructive political backdrop for housing and downtown recovery under the relatively moderate administration of Mayor Daniel Lurie, which has improved sentiment even before fundamentals fully normalize, according to Thomas Feldstein, partner, chief operating officer and general counsel at GTIS.

Pricing Discounted to Where San Fran Should Trade

Feldstein told GlobeSt.com that pricing still feels discounted relative to where San Francisco should trade over the long term. He thinks replacement costs could be well above $1,100 to $1,200 per foot, particularly for prime-located existing assets.

"Even though fundamentals have improved, the market is still in recovery mode rather than fully repriced," he said.

"That disconnect is important because new development remains constrained, and supply is exceptionally limited. In our view, that leaves existing product trading more attractive than replacement economics would suggest, especially given how little new competitive supply is likely to arrive in the near term."

Feldstein said that valuations remain below prior highs because San Francisco's recovery has been later and more uneven than in other major apartment markets.

The downtown office recovery is improving, but it has not yet fully reset renter demand to pre-COVID patterns and capital markets still reflect higher interest rates and more conservative underwriting than during the prior peak cycle.

"From here, further rent growth, continued AI-driven hiring, and a sustained lack of new supply should be the main drivers of additional recovery," he said.

Demand has clearly improved, according to Feldstein. Per Marcus & Millichap, the city has benefited from strong rent-by-choice demand in 2025, with the sharpest gains in downtown submarkets such as SoMa and Mission Bay, where year-over-year rent growth exceeded 10% as of late 2025.

Class A monthly rents across the metro rose by nearly 10%, while Class B and C vacancy rates remained below 4% in some submarkets.

"Broadly, that points to a market with tightening occupancy and increasingly healthy leasing momentum," according to Feldstein.

Operating Costs Remain Elevated

However, operating costs are still elevated and insurance remains one of the clearest pressure points for owners. Industry surveys continue to show that multifamily insurance costs remain high and weigh on net operating income even as revenues improve.

"Investors are beginning to underwrite these higher costs more consistently, which helps reduce uncertainty, even if the expense burden remains significant," he said.

Overall, from a risk-adjusted standpoint, San Francisco is one of the most compelling multifamily markets in the country today, according to Feldstein.

"You have improving renter demand, a supply-constrained development backdrop, and a market that still has not fully repriced to reflect those conditions," he said.

At the same time, the Bay Area remains the center of the AI economy, which supports job creation and household formation at the higher end of the renter base.

It's a combination that is difficult to replicate elsewhere, he added.

The opportunity set in San Francisco is meaningfully broader today than in prior years, driven by strong investor interest in both rent-controlled assets—which represent the vast majority (~94% of existing stock) of the market—and newer-vintage product as it becomes available.

"As demand has strengthened, more owners are bringing assets to market, and transaction activity has picked up accordingly," Feldstein said. "Notably, recent trades have continued to show improving pricing dynamics, with each deal helping to reset expectations and support further momentum in the market."

Source: GlobeSt/ALM