Gouges left by the pandemic in San Francisco's real estate market and general economy are slowly healing, but like any deep wound, they're leaving scars.

For property in the city, the marks left behind come in the form of a great reset, bringing values back down to earth after their sky-high climb in the years leading up to the pandemic.

“For every doom loop, you need a boom loop,” Eric Tao, L37 Partners managing partner and Urban Land Institute San Francisco chair, told Bisnow. “We were in a loop of constant success. First, the tech companies came, then the talent wanted to live here. Facebook and Google threw up their hands and wanted to open offices here. They all followed that boom loop that was happening, and it was going to be forever.”

The boom brought with it a heavy concentration in tech companies as the main tenants in downtown San Francisco, which drove lease rates and sales prices to new heights but offered little insulation when the tide turned.

Downtowns across the country are facing similar reckonings, with buyers who believe the market has hit bottom snapping up prime properties as sellers seek shelter from interest rates and depressed demand.

“Market participants will need to recalibrate their expectations to reflect diminished drivers in the coming years to the detriment of rent growth, property values, and returns,” ULI’s 2024 Emerging Trends report says.

But San Francisco's pre-pandemic highs were so much higher than other cities' that the reset looks that much more extreme.

Before the pandemic, office rents in San Francisco hit $100 per SF, beating out Midtown Manhattan and well above the national average of $33 per SF at the end of 2019, according to Cushman & Wakefield.

Today's office rents in San Francisco are closer to $70 per SF, according to CBRE. That translates to lower sales prices, with properties trading for $200 to $300 per SF, down from $800 to $1,000 per SF before the pandemic.

Deals that serve as examples of these pricing trends are piling up. The building at 350 California St. sold for $200 per SF, down from its pre-pandemic price tag of $800 per SF. The former Wells Fargo Tower at 550 California St. went for $120 per SF, and 201 Spear St. traded for $200 per SF.

Low office demand isn't entirely to blame. Rising interest rates have made once-manageable loan balances untenable for many investors, causing them to default.

“When loans hit this [real estate-owned] status, it’s generally considered a sign that they can be had at fire sale prices,” David Putro, head of CRE analytics at Morningstar, told Bisnow.

With this reset comes the opportunity for reflection and formulating new strategies to come back better and stronger, with some city leaders indicating that diversification of the city's employment base could be in order.

“Our city has slowly become a one-dimensional type of use,” Tao said. “You could allow that to repeat itself. But we don’t want this type of pattern anymore. Downtown is too precious. This is an opportunity to reshape, reshape downtown to avoid this cyclical doom or bust, repetitive nature.”

Downtown could also lean into residential development, said Natalie Sandoval, executive director of ULI San Francisco.

“Bringing some housing into downtown is definitely something the city is considering,” Sandoval told Bisnow. “You can’t just put people downtown in commercial districts. There has to be amenities that they need when they live in a neighborhood, whether that is a daycare center, grocery store or place for educational activities. That’s all something that could be part of this mixed-use district in the future.”

If San Francisco is going to use this reset to revitalize downtown, the city will need to be an active participant, sources said. In the past, downtown was a place to “extract money, not attract money,” according to Tao. The new normal of downtown San Francisco could be different.

“I think the motivation is there,” Tao said. “I see the Office of Economic and Workforce Development focused on this. We see the mayor enacting different initiatives. There’s an opportunity to think about how we’re going to respond to this crisis.”