A cityscape with the San Francisco Bay Bridge on June 6th. (Tayfun Coskun/Anadolu Agency via Getty Images)
The announcement last week by a major hotel group that it was giving up two flagship hotels in downtown San Francisco was the latest blow to a city hit like no other by the coronavirus pandemic.
Another blow came days later when mall operator Westfield announced it was fleeing its massive downtown property.
Some residents fear San Francisco is slipping into a “doomsday loop” in which commercial real estate collapses, municipal tax revenues disappear, and city services are severely curtailed.
Other cities have faced similar problems, but none quite like San Francisco.
Read more: San Francisco is homeless, ‘mentally ill and fentanyl’ makes it ‘worse than third world,’ reporter tells CNN
Remote work leads to empty offices
Office vacancies have reached a record high in San Francisco. (Justin Sullivan/Getty Images)
In the years leading up to the pandemic, the tech sector based in the Santa Clara (i.e., Silicon) Valley began to encroach into the city itself. The neighborhoods are full of wealthy young techies. Salesforce built a gleaming new skyscraper in the South of Market neighborhood, while Twitter moved into an Art Deco fortress on Market Street, the city’s main thoroughfare.
Then came COVID-19. It should come as no surprise that the city, which launched co-working platform Slack, was quick to embrace remote working.
Given the opportunity to leave San Francisco, many workers did just that. In recent years, the city had become one of the least affordable in the United States, with the average rent for a one-bedroom house there being $3,000 per month. In the first year of the pandemic, San Francisco lost 6.3% of its residents, the largest decline of any American city.
Civic leaders like Mayor London Breed and Marc Benioff, founder of Salesforce, have pushed for a return to office work, but those efforts have met with lackluster results — and growing concern.
“It’s not the employer’s responsibility to ‘fix’ San Francisco,” TechCrunch’s Connie Loizos wrote in 2022. “At the same time, if they wait too long, there may not be much left to fall back on.”
The story goes on
Read more from our partners: Why remote work is becoming a Blue State privilege
“Melts Down Quickly”
A pedestrian walks down an empty street in San Francisco on February 13 with a billboard to the left of a building from another era. (Carlos Barria/Reuters)
“Commercial real estate is melting away fast,” Tesla and Twitter’s Elon Musk recently warned. He wasn’t exaggerating: by the end of 2025, nonresidential landlords across the country will owe a staggering $1.5 trillion.
Office landlords are struggling to find new tenants as few companies are actively looking for space. Their properties are falling in value quickly, yet landlords still have to pay back loans they took out before the pandemic.
Failure to repay these loans could trigger a banking crisis similar to the one that devastated the real estate market in 2007-2008.
The situation is particularly dire in San Francisco, where 18 million square feet – a third of all office space in the city – is vacant. While some cities have attempted to convert offices into apartments, the process to do so is complex and nowhere near the panacea some might desire.
There are also downstream effects. Small shops – lunch counters, florists, newspaper kiosks – are closing. Janitors and other service workers need to find new jobs.
Park Hotels & Resorts’ decision to abandon its Parc 55 and Hilton hotels was a painful vote of no confidence in the city’s future. “We believe more than ever that major challenges continue to cloud and prolong San Francisco’s path to recovery,” said the company’s chief executive officer.
The speed with which Westfield followed suit strongly suggests that this opinion is widely shared.
Read more from Yahoo Finance: The commercial real estate market is faltering and two of the biggest players are feeling the pain of higher interest rates and tighter credit
The doom loop
A group of apparently homeless people on the streets of San Francisco on May 16. (Tayfun Coskun/Anadolu Agency via Getty Images)
Property taxes help fill municipal coffers. An empty office tower loses value, which means that fewer taxes are due. And the value goes down. In San Francisco, a tower at 350 California St. that was worth $300 million before the pandemic is now worth an estimated $60 million.
According to an estimate by the Institute on Taxation and Economic Policy, San Francisco could lose up to 9% of its revenue due to the destruction of its commercial real estate market. The city’s budget deficit is already $780 million, leaving City Hall with little room for maneuver.
“It’s not a good story, it’s not a happy story, but it’s the reality we have to live with,” city manager Aaron Peskin recently told local magazine KGO. Peskin warned of “a significant financial impact on the San Francisco government’s tax base.”
The reluctance of tourists and conventioneers to return is another source of financial problems that show no sign of abating.
Learn more from our partners: companies save themselves from San Francisco, experts explain what needs to change
A crisis on the streets of San Francisco
A barefoot person crowds the street in San Francisco on May 16. (Tayfun Coskun/Anadolu Agency via Getty Images)
Crime, drug use and homeless encampments were challenges before the coronavirus hit San Francisco.
The pandemic has turned it into a crisis.
Breed, the mayor, has vowed to restore order. But the ready availability of fentanyl, lack of mental health services, and lack of police officers have thwarted their plans. Police recently seized enough fentanyl in the city to kill 2.1 million people, nearly three times the current population of around 800,000. And Breed hasn’t been able to blame Chesa Boudin, the widely unpopular district attorney, since voters ousted the divisive progressive in a June vote a year ago.
“San Francisco leaders are brushing aside the bad news and saying the city will recover,” San Francisco resident Anastasia Edel recently wrote in the Los Angeles Times. “But nobody seems to know what that looks like or what the way forward looks like.”
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