Our Firm
Resi Wrap - Darkest Before Dawn
October 2023

“Don’t call it a comeback. I’ve been here for years.” - LL Cool J

“Americans can always be trusted to do the right thing, once all other possibilities have been exhausted.” - Winston Churchill (maybe)

Friends of ResiShares -

Greetings from San Francisco, the benighted hellhole where the living envy the dead.

Not pictured: unpleasantness

The collapse of San Francisco’s downtown economy and civic order have been well-documented and even better-schadenfreuded since the pandemic abruptly brought its various and sundry mismanagement chickens home to roost. Open-air drug markets, rampant retail crime, all ignored and accepted by an ineffectual social services system and an unsupported justice system.

All of this exists against a backdrop of the downtown urban “Doom Loop,” in which empty office buildings both gut tax revenues and allow lawlessness to fill the vacuum.

Earlier this month, The New Yorker dropped a long thought piece on the decline and fall of the San Franciscan empire. It is worth a read. It notably documents several vectors for the city’s potential future comeback that will be the subject of this month’s note.

The Political Establishment - The article variously describes, quotes, and interviews Mayor London Breed and opposing forces within her administration and on the Board of Supervisors. While unsparing in criticism between the factions, the most remarkable thing about their responses was the unanimous consensus defining the problems themselves. In other words, a scant few years after electing (then recalling) Chesa Boudin as District Attorney on a decriminalization platform, a city with the most left-wing reputation in America appears aligned on the paramount importance of reducing petty crime and open drug use.

Political Entrepreneurship - Political entrepreneurship has recently been mostly of the scary kind, with previously marginalized opportunists attacking the boundaries of the Overton Window. San Francisco today reminds us that when a democracy faces salient and broadly obvious problems, political entrepreneurship is its equilibrating force. The article interviews the founders of several organizations, including GrowSF, Together SF Action, and Civic Joy Fund, all aiming to shake up the institutional sclerosis that they believe prevents the city’s renewal. The financial backers include VC Michael Moritz and philanthropist Daniel Lurie, a long-time power broker in Bay Area circles who is also running against Breed for mayor.

Grass Roots (but with money) - The article includes a profile of Manny Yekutiel, a well-connected political operative from the 2012 Obama campaign that has taken to picking up trash around the city as part of a cleanup campaign. This being San Francisco, there’s nothing worth doing if it can’t be done at scale, and community organization appears to be no exception.


It is difficult to find many examples in history of a city that fell from such a lofty height and was able to return to its former glory. While Detroit and Baltimore suffered gradual but irreversible (thus far, at least) declines, the analog that comes immediately to mind is New York in the 1970’s. Any reporting on the depths to which NYC sank in that period, or, for my fellow Yankee fans, a viewing of the TV series “The Bronx Is Burning,” provide perspective on just how awful it was. Apparently, Ghostbusters was largely a documentary.

Not pictured: Ernie Hudson completely losing it after they cut to the next take. Seriously, I never noticed before how hard he’s trying to keep from laughing out loud in this clip!

What made New York more successful in its comeback than Detroit or Baltimore (or Cleveland or Pittsburgh or Buffalo, for that matter)? With apologies to Mr. Cool J, it is because New York had been here for years. Even at its worst, New York maintained, to use one of our favored physics analogies, critical mass as a focal point for business, arts, and culture. It never had to reinvent itself, only to get out of its own way. New York was too big to fail. The powerful vested interest in maintaining New York as the center of the universe, as Mr. Churchill (may or may not have actually) said, allowed New York’s political players to “do the right thing, after all other options had been exhausted.”  

The story of New York’s past comeback reads much like San Francisco’s hoped for future. To wit:

The Political Establishment - Like San Francisco, New York was a Democrat city. From Mayor La Guardia’s departure in 1945, a Democrat sat in the mayor’s office in all but 4 of the subsequent 50 years (John Lindsay, the lone Republican, switched to the Democratic party in 1971). As with Breed in San Francisco, Mayor Ed Koch would emerge from the Democratic establishment, running to the right of his primary opponents on a fiscally conservative platform. While, as a “wartime” mayor, he would struggle to move New York forward on tangible metrics, his front assault on the fiscal challenges that faced the city set the stage for its subsequent success.

Political Entrepreneurship - Koch would be followed by two political entrepreneurs. David Dinkins, the city’s first African American mayor, represented a key Democratic constituency achieving de jure power for the first time. Rudy Giuliani, the second Republican mayor in 50 years and the first to serve two terms with that party affiliation,  still receives most of the credit for the city’s ultimate redemption, largely at Dinkins’ expense. The two mens’ contrasting styles and bitterly fought election battles belie a consistent policy orientation towards solving New York’s crippling violent crime problem uber alles. The space for both Koch’s cost-cutting and his successors’ crime fighting was arguably created by the city having been driven to the brink of collapse beforehand. The darkness before the dawn.

Grass Roots (but with money) - It’s helpful when the city’s skin in the game is owned by the world’s most important financial interests. In the case of New York, this was both a direct pecuniary interest in its real estate as well as finance’s reliance on a large pool of colocated, young, and educated labor for its success. New York had the kind of clout to induce foreign heads of state to call President Ford in the ‘70’s, asking him to consider a federal loan repackage to stave off bankruptcy. Detroit has had no such support. San Francisco’s tech sector is famously not vested in the city’s success, but the open disdain from the Thiel-Musk-Sachs axis of the VC community overshadows the tremendous economic power of those who are thusly vested. Mark Benioff’s Salesforce, for instance, has both large direct real estate investments and obvious benefits from the agglomeration of young talent akin to the New York investment banks. Google and Meta, to a somewhat lesser extent, do as well.

The parallels between 1970’s New York and 2020’s San Francisco are unmistakable, but inexact. As I suspect LL Cool J would appreciate, history does not repeat, but rhymes. What can be learned from these parallels?

1) Solving the real problems on the ground can take a very long time.

NY Mayor Abe Beame came to terms with the public workers’ unions in 1975. Koch got the city on solid fiscal footing a decade later. The actual crime problem did not peak until halfway through Dinkins’ term, nearly a decade after that, and did not fall to what we today would consider an acceptable level until almost 2000. That’s 25 years. While it may be darkest before dawn, the night can last a very long time.

2) But real estate markets can recover much more quickly.

Markets are forward looking, even one as notoriously slow as real estate. While the crime problem took 25 years of investment to solve, the fiscal turnaround in the late 70’s/early 80’s had a virtually immediate positive impact on NY residential real estate prices.

The charts above show real, rather than nominal, home price indices, to account for the high inflation of the late 70’s and early 80’s. The sharp rise and fall in prices from the Savings and Loan crisis notwithstanding, the overall trend turns from negative to positive in 1983.

New York primarily faced a fiscal problem and a crime problem. Solving the first immediately disrupted the vicious cycle of the Doom Loop, and created the financial conditions to afford to fix the second.

San Francisco primarily faces an affordability problem and a crime problem. Fortunately, it does NOT face a fiscal hole, and can solve both by simply mustering enough political will, which seems to finally be occurring.

One final point on its affordability problem. The Doom Loop can also work in reverse. This study in Connecticut demonstrates that building more housing expands the tax base and then works in turn to LOWER the property tax burden on homeowners. The conclusion, in retrospect, seems almost tautologically obvious. Building enough homes for people who want to live in them is good for business.

The Rest Of Resi

Hot take alert: We’re calling a bottom in Austin in 2024. It’s down nearly 20% from the highs, and the dinosaur is saying that’s quite enough of a discount for this fast-growing and highly educated economic powerhouse.