The problems facing San Francisco are not unique to that city alone, but they are a painful lesson.

Since the onset of the pandemic, I’ve written extensively about the shifting tectonics of American commercial real estate. From New York to Los Angeles, the industry has faced a relentless unraveling. But few cities encapsulate the scale and speed of this collapse quite like San Francisco.

Once a city of innovation and energy, the “City by the Bay” now finds itself at the center of a commercial real estate reckoning—marked by rising vacancies, plummeting property values, and mounting debt that threatens to undermine not just investors but the very urban ecosystem itself.

I used to love visiting San Francisco. Over the years, my work often brought me there. Its streets, its skyline, its vitality—everything once suggested progress and promise. Today, walking through downtown feels like stepping into a faded postcard. The vibrancy is gone, and in its place are shuttered storefronts, silent office towers, and a growing sense of economic malaise.

This isn’t just an aesthetic decline. It’s financial. It’s systemic. And it’s accelerating.

The Market Unravels

One of the central drivers of this transformation is the collapse of office demand. As remote work reshaped workplace norms, major tenants abandoned downtown footprints, and building owners saw their fortunes wither. I’ve called it the “tsunami of the deluge of debt.” And San Francisco is now ground zero.

An AI program I consulted put it plainly: “San Francisco’s commercial real estate market has experienced significant declines in property values, primarily due to high vacancy rates and shifts in work patterns.” In other words, workers aren’t returning to the office. And buildings are becoming empty shells.

Capital Economics projects that office property values in San Francisco will decline by 40% to 45% between 2023 and 2025. But in some cases, the drop has already been more severe.

Class-A office buildings—those institutional-grade properties once deemed recession-proof—have lost about 50% of their 2019 value. Mid-tier offices are even worse off, with average reductions of around 70%. Take the San Francisco Centre near Union Square: a retail complex valued at $1.22 billion in 2016 now sits at $221.7 million—a 76% decline. The office building at 340 Bryant Street has plummeted 84%, erasing $43.8 million in value.

And yet, if you speak to portfolio managers and property owners in California, many remain in denial. They either haven’t accepted—or won’t admit—that their holdings are hemorrhaging value. There’s little appetite for updated appraisals. Perhaps because the truth is too uncomfortable: their portfolios are drowning, and their egos won’t allow them to acknowledge it.

A Forecast Fulfilled

I first outlined this coming collapse in 2020 in my article “How COVID Upended Real Estate.” I warned of the deep and lasting impact of remote work in “Post-Pandemic Reality: The Tsunami of Vacant Office Space” in January of 2022. And again, in “The Tsunami of Shrinking Commercial Office Leases Has Hit,” I traced the broader consequences: a ripple effect that has not only gutted property income but also downtown economies as a whole.

When companies reduce their office footprint by 50%—and 100 or more companies do this within the same few blocks—the result is catastrophic. Property owners lose rent. Cities lose tax revenue. Restaurants, retailers, and service providers experience a decline in foot traffic. The economic foundation of downtown districts begins to crumble.

And yet this moment also reveals a deeper failure: our appraisal system is fundamentally broken. The traditional methods used to value commercial properties are relics. They fail to account for the most pressing requirements of modern tenants: redundant power systems, secure broadband infrastructure, and tech-resilient architecture. Most buildings, even those built recently, are ill-suited for today’s digital economy.

Knock another 10% to 20% off valuations to account for that technological obsolescence.

You can’t assess 21st-century buildings with 20th-century tools. Some properties aren’t just underwater—they’re already sunk. These buildings are not distressed. They’re derelict. The metaphor isn’t just one of ships listing in the water—it’s of ocean liners at the bottom of the sea.

The Third Wave: Debt

If vacancy and value declines were the first two tsunamis, the third is now upon us: the deluge of debt. And it’s hitting the banking sector hard.

Veritas Investments defaulted on nearly $1 billion in loans tied to 95 apartment complexes across the city. Park Hotels & Resorts halted payments on a $725 million loan associated with two hotels: Hilton San Francisco Union Square and Parc 55. Unibail-Rodamco-Westfield walked away from $558 million in debt tied to the Westfield San Francisco Centre mall.

These are not isolated incidents. They are signals of systemic stress.

San Francisco’s commercial real estate implosion is now bleeding into the financial sector. Banks that hold these debts are under immense pressure. The collateral supporting many of their loans has crumbled.

We’ve already seen the consequences. First Republic Bank, headquartered in San Francisco, collapsed in May 2023—the second-largest bank failure in U.S. history. The cause? A mix of interest rate risk, uninsured deposits, and exposure to real estate. A few months earlier, Silicon Valley Bank folded after a run triggered by concerns over its investment portfolio. While CRE wasn’t the direct cause, the macroeconomic environment—characterized by rising rates and falling values—contributed to the collapse.

A Market Still in Denial

The question now isn’t whether the damage is real. It is. The question is: how many more institutions are exposed? How many portfolios are overleveraged and overvalued? And how many will go up in smoke before the industry admits the fire is already burning?

The San Francisco story is not just a tale of one city’s decline. It’s a cautionary parable about denial, inertia, and the consequences of ignoring structural change. The tsunami has hit. The water has risen. And far too many still think they can stay dry by looking the other way.