More expensive buildings have sold in San Francisco in this fiscal year, a sign that the city’s battered post-COVID-19 office market finally may be starting to turn a corner.
Transfer tax revenue collected by the city on big commercial real estate sales is expected to grow for the first time in four years, according to recent projections by city officials. San Francisco is expected to pick up $229.6 million during fiscal 2024-25, which ends June 30, according to a report released this month by the San Francisco controller’s office. That’s almost a third more than the $177.7 million the city brought in during the previous year and nearly $11 million more than budgeted. It marks the first increase in annual transfer tax revenue since the 2020-21 fiscal year.
Transfer tax revenue had been on a downward spiral in recent years in San Francisco as its downtown office buildings languished. Last year it hit a low it had not reached since the years after the Great Recession “as few large office buildings traded hands, and those that did, traded at reduced prices,” city Controller Greg Wagner said in a report released in late 2024.
The increase this year suggests that may have been the end of the decline — a hopeful sign in a city that was one of the hardest hit in the nation by the pandemic. The positive trend is in part attributable to an increase in high-value property sales, according to the controller’s office.
The number of property sales over $10 million — which the city taxes at its highest rates — is expected to increase in the current fiscal year for the first time since the pandemic, wrote city fiscal analysts. While the number of big, high-priced property deals remains low compared to pre-pandemic times, it’s “starting to recover,” they wrote.
The average annual number of transactions over $10 million between FY 2014-15 and FY 2018-19 was 143. Since then, the number of these high-priced deals has declined nearly every year, but the current fiscal year is expected to reverse that trend, ending with 74 large taxable transactions, 32% more than the prior year.
Mansion taxes
So-called mansion taxes — taxes on high-end real-estate sales, including commercial properties in some places — are becoming more common as cash-strapped governments look for new funding sources.
In Los Angeles, Measure ULA took effect in April 2023 and places a 4% levy, up from 0.45%, on property sales topping $5.15 million, and a 5.5% charge on deals exceeding $10.3 million. Chicago voters last year rejected a similar tax on properties over $1 million, while Seattle voters recently approved a property tax aimed at helping low-income renters.
In San Francisco, voters have approved four increases in transfer tax rates since 2008; in 2020, they approved Proposition I, which doubled the tax rate for sales of at least $10 million to 5.5%. For properties selling over $25 million, the rate was raised from 3% to 6%.
San Francisco is still collecting much less in property transfer taxes than it has historically. The city’s past projections suggest that officials may have underestimated how long it could take for San Francisco’s downtown commercial real estate market to stabilize. The city projected transfer tax revenue at $222 million for fiscal year 2023-24, 20% more than was actually collected.
Officials told CoStar News previously that the city might need to rethink its heavy reliance on revenue from big-ticket real estate sales in light of its new economic reality.
Transfer tax revenue is considered notoriously volatile since “the vast majority of the revenue comes from a very small number of high-value sales,” said Michelle Allersma, budget and analysis director for the controller’s office. Moreover, the report noted that transfer tax revenue is “highly dependent on conditions in the local economy.”
Over the past half decade, San Francisco has seen its office vacancy rate rise from the lowest in the nation to the highest as a perfect storm of COVID-19 pandemic lockdowns, remote work and layoffs by technology companies caused tenants to downsize at record levels. As a result, San Francisco’s formerly flourishing Financial District became dotted with half-empty office buildings and half-deserted streets, while owners struggled to keep hold of their properties as the cost of debt increased and values fell.
Signs of life
But the Bay Area’s commercial real estate market has shown signs of a gradual recovery in recent months, especially in the leasing market. Over the last six months, leasing volumes have reached their highest levels since early 2022, according to CoStar. The surge has largely been fueled by expansions from tech companies, especially in the artificial intelligence sector, driving an increase in demand for new office space.
Last month, DivcoWest and investor Blackstone Real Estate paid $111.3 million for a 25-story vacant building at 300 Howard St. in the city’s South of Market Street neighborhood, with plans to attract artificial intelligence tenants.
“We are big long-term believers in San Francisco," David Levine, Blackstone’s co-head of Americas acquisitions, said in a statement.
This month, LendingClub Corp., a digital banking platform, finalized its bid to acquire the 21-story tower at 88 Kearny St., with plans to house its headquarters there.
Investors are also taking advantage of bargain prices to snap up properties in downtown San Francisco amid a growing consensus that the city has begun a recovery that is gradual but building momentum. Locally based Sansome Street Advisors acquired the 145,500-square-foot property at 799 Market St. for $44 million.