Daryl Gibson says the Waratahs are not playing to their potential after dropping their fourth game of the season in Auckland.
The Tahs' defeat and the Rebels' victory over the Sunwolves saw the Melbourne side extend their conference lead to seven points.
But still clinging to eighth spot on the Super Rugby ladder, the NSW coach views the fact they still haven't rolled out their A-game as a silver lining.
The Waratahs paid dearly for a slow start against the Blues at Eden Park, fighting back from a 17-0 deficit in the first 17 minutes to lose 32-29 at the final hooter.
After what appeared a statement win against the Crusaders, it was the second consecutive loss for the Waratahs, following their defeat to the Sunwolves in Newcastle.
Asked post-game if he felt his team was far off, Gibson said: "Do I think we’re far off? Yeah, I think we have still got growth in us. A lot of growth and that’s a positive thing. We are scrapping well and competing at the moment and that gives us a chance.
"The game tonight was pretty even. It’s the second game in a row we have lost by a few points,” Gibson continued.
"Every game we have lost this year we have been in. It’s disappointing we couldn’t close that game out.”
Israel Folau's milestone night ended on a sour note as the Waratahs went down in the tense Super Rugby thriller.
Wallabies star Folau scored one try and set up another to help the Waratahs claw back from 17-0 down. but they ultimately fell frustratingly short at Eden Park.
With his team trailing 22-21 midway through the second half, it was a loose pass from Folau that ultimately proved decisive, allowing Blues veteran Ma'a Nonu to charge 40m for the game's final try.
It was unfortunate for the world class fullback, who was a threat throughout and leapt in trademark style from a Bernard Foley cross-kick to open the Waratahs' scoring.
That was his 60th Super Rugby five-pointer, giving him the outright lead on the competition's all-time try-scoring list, one clear of former Blues flyer Doug Howlett.
Folau turned provider for winger Alex Newsome in the second half while their other tries went to flanker Will Miller and reserve halfback Jake Gordon.
However, it wasn't enough to make up for a mediocre start in which the Waratahs allowed the Blues to roll over the advantage line and rack up 17 points in 17 minutes.
Former All Blacks great Nonu threw the last pass for tries to Tom Robinson and Caleb Clarke and they were never headed from there as the Blues clocked up a 10th win over the New South Welshmen at Eden Park in 11 meetings.
"It was part of our gameplan against the Blues to pin them in their territory but the first 15 minutes we struggled to do that," Gibson said.
"We let them out with easy penalties. The rest of the game I thought we controlled territory well and gave ourselves a chance to score points."
The loss leaves the Waratahs with a 3-4 record.
The Blues improve to 4-3, having notched four successive wins for the first time since 2011.
There were some standout figures in a visiting pack missing the rested Michael Hooper, with prop Harry Johnson-Holmes enhancing his reputation, along with loose forwards Michael Wells and Jack Dempsey.
Kurtley Beale added spice to their back play when introduced for the last half hour.
Tries: Robinson, Clarke, Faiane, Nonu
Cons: Black 3
Tries: Folau, Miller, Newsome, Gordon
Cons: Foley 3