San Francisco might collapse. What ought to California do about it?
Downtown San Francisco is at risk of collapsing — and taking much of the Bay Area with it.
Experts say post-pandemic woes stemming from office workers staying home instead of commuting into the city could send San Francisco into a “doom loop” that would gut its tax base, decimate fare-reliant regional transit systems like BART and trap it in an economic death spiral.
Who could have predicted such a fate?
Anyone who paid attention to what happened in New York after the 9/11 terrorist attacks.
Like San Francisco, lower Manhattan’s Financial District was once a nearly exclusive daytime hub for suburban office commuters and the businesses who fed them lunch — and a ghost town after dark.
That all changed after 9/11.
The attacks not only devastated lower Manhattan physically, they also threw into question the very logic of the neighborhood’s urban fabric; commuters, it was assumed, would never again want to work in office towers over fears of terrorism.
So, to stave off a doom loop of its own, New York came up with a vision for reinvention.
The Financial District would become a place where people actually lived as well as worked. Local, state and federal officials rallied behind the plan. It took an estimated $20 billion in public and private investments to fund this vision, which included two new train stations, public parks, malls and once-in-a-generation tax breaks for developers to convert office buildings into apartments. The federal Housing and Urban Development Department also distributed $281 million to incentivize people to live in the neighborhood.
The area more than bounced back. It added over 60,000 residents who, perhaps unsurprisingly, needed little convincing to move to a climate-friendly, 24-hour neighborhood filled with pedestrians, restaurants, culture, nightlife and easy access to public transit.
The tragedy of 9/11 inadvertently revealed the glaring vulnerabilities and inadequacies of office-dependent, 9-to-5 business districts — and created a new model for making American downtowns more stable economic engines for local governments and fostering better, more compelling urban life.
Unfortunately, San Francisco didn’t get the memo.
Despite our housing crisis, it was years into the COVID pandemic before our leaders meaningfully questioned the logic of reserving some of the most prized real estate on Earth for fickle suburbanites and their cars. Downtown, after all, was San Francisco’s golden goose. Companies in downtown offices accounted for 70% of San Francisco’s pre-pandemic jobs and generated nearly 80% of its economic output, according to city economist Ted Egan.
And so we wasted generous federal COVID emergency funds trying to bludgeon, cajole and pray for office workers to return downtown instead of planning for change. We’re now staring down the consequences for that lack of vision.
The San Francisco metropolitan area’s economic recovery from the pandemic ranked 24th out of the 25 largest regions in the U.S., besting only Baltimore, according to a report from the Bay Area Council Economic Institute. In the first quarter of 2023, San Francisco’s office vacancy rate shot up to a record-high 29.4% — the biggest three-year increase of any U.S. city. The trend isn’t likely to end anytime soon: In January, nearly 30% of San Francisco job openings were for hybrid or fully remote work, the highest share of the nation’s 50 largest cities.
Amid lower property, business and real estate transfer taxes, the city is projecting a $728 million deficit over the next two fiscal years. Transit ridership remains far below pre-pandemic levels. In January, downtown San Francisco BART stations had just 30% of the rider exits they did in 2019, according to a report from Egan’s office. Many Bay Area transit agencies, including Muni, are rapidly approaching a fiscal cliff.
San Francisco isn’t dead; as of March, it was home to an estimated 173 of the country’s 655 companies valued at more than $1 billion. Tourism is beginning to rebound. And new census data shows that San Francisco’s population loss is slowing, a sign its pandemic exodus may be coming to an end.
But the city can’t afford to wait idly for things to reach equilibrium again. It needs to evolve — quickly. Especially downtown.
That means rebuilding the neighborhood’s fabric, which won’t be cheap or easy. Office-to-housing conversions are notoriously tricky and expensive. Demolishing non-historic commercial buildings that no longer serve a purpose in the post-pandemic world is all but banned. And, unlike New York after 9/11, San Francisco is a city that can’t seem to stop getting in its own way.
This is the city where it can take 87 permits, 1,000 days of meetings and $500,000 in fees to build residential housing projects. This is the city — the only one in the state — that allows housing permits to be appealed even after projects are entitled. This is the city where it costs an estimated $100,000 to build one tiny home for the homeless — up to 10 times more than in other Bay Area cities — and almost $1.2 million to build a single unit of affordable housing. This is the city that at one point celebrated plans to build a single public toilet for $1.7 million.
Even with decisive action, New York couldn’t dig itself out of its post-9/11 hole alone. Generous state and federal interventions were required.
But if you were the state of California, and you were staring down a projected $22 billion budget deficit, would you invest your scarce resources in San Francisco, which has repeatedly proven itself unfit for such investments by building a vast, inefficient bureaucracy at the expense of taxpayers and vulnerable residents?
Simultaneously, it makes little sense for California to allow one of the world’s greatest cities to free fall — and to allow climate-killing Bay Area transportation patterns to persist for another generation.
The state needs to intervene and offer San Francisco financial and technical assistance — but it can’t save the city from itself. Local officials need to prove they’re committed to change and present a compelling vision for maximizing state investments.
Thankfully, we’re finally seeing some action in that regard.
In February, Mayor London Breed unveiled a San Francisco reinvention plan that she said is focused on ensuring downtown can “accommodate the widest possible range of activities and uses.” Last week, she followed up by proposing more than 100 changes to streamline the permitting process for small businesses, denouncing San Francisco’s current process as “criminal” in a press conference. And on Monday, Breed and Board of Supervisors President Aaron Peskin introduced legislation to make it easier to convert office buildings to housing, fill empty storefronts in Union Square and expand pop-up business opportunities.
About 40% of office buildings in downtown San Francisco evaluated in a study would be good candidates for housing due to their physical characteristics and location and could be converted into approximately 11,200 units, according to research from SPUR and the Urban Land Institute San Francisco. New York’s example demonstrates the multifaceted benefits of this type of transformation. More eyes on the street from residents would make the neighborhood safer after dark and allow for a greater variety of neighborhood small businesses. There would be benefits for public transit, too; only around 18% of New York Financial District residents own cars.
But the SPUR report also found most conversion projects “are not financially feasible.”
Some constraints to conversion would be addressed by Breed and Peskin’s legislation. Still, there’s only so much the city can do on its own. Failure to get buy-in from the state will almost certainly lengthen our doom-loop cycle and squander the opportunity to improve downtown.
A bill from state Assembly Member Matt Haney, D-San Francisco, would offer grants to developers who turn unused office space into housing while streamlining permitting and approval processes and exempting projects from certain impact fees. But it has yet to be scheduled for a hearing, largely because many complexities are still being worked out. Among them are the size of the grants and affordability, and environmental and labor requirements — which tend to be among the most controversial issues in the Legislature and often contribute to the demise of housing bills.
Meanwhile, Breed has also vowed to overhaul San Francisco’s notoriously convoluted and expensive process for building housing, issuing an executive order calling for a slew of actions to help the city meet its state-mandated goal of accommodating 82,000 units in the next eight years.
Many of her plans will require signoff from the Board of Supervisors, with whom she has clashed over policies for streamlining affordable housing. That’s why it was encouraging this week to see Breed and Peskin present their office conversion bill together and to see supervisors approve legislation co-authored by Breed and Supervisor Shamann Walton to accelerate stalled housing projects. Collaboration will be critical in getting San Francisco back on track.
But there is hardly local consensus on a path forward.
Jim Wunderman, president and CEO of the Bay Area Council, is among those who think California should follow in the footsteps of Canada, which leveraged public-private partnerships to transform downtown Toronto into North America’s largest urban “innovation hub.” Using a similar model, Wunderman said, California could help shift downtown San Francisco’s focus from tech — with employees now accustomed to working from home — to research and development, biotech, medical research and manufacturing, which all require in-person workers. Breed said that San Francisco’s biotech office vacancy rates are below 5%, with many companies desperate for more space.
But simply replacing one industry with another would still leave San Francisco vulnerable to the risks of an undiversified economy. Indeed, downtown Toronto by some metrics has fared worse than downtown San Francisco. And every other city in America will likely be courting the same businesses. How can San Francisco set itself apart?
Haney offered one idea: Embracing the area’s physical beauty and leaning into its cultural, creative and artistic strengths by emphasizing nightlife, entertainment, hospitality and tourism. Breed is pushing for the creation of a downtown arts, culture and entertainment zone and is backing a bill authored by state Sen. Scott Wiener, D-San Francisco, to permit outdoor alcohol consumption at certain venues.
It’s hard to imagine any of these plans having their desired impact, however, if public transportation systems are forced to make drastic service cuts, which would likely happen if state lawmakers approve Gov. Gavin Newsom’s budget proposal to cut $2 billion for transit capital projects and offer no money for transit operations.
The devastation would be acute in the Bay Area — where 27 transit systems anticipate a cumulative operating shortfall of $2.5 billion to $2.9 billion over the next five years — and in San Francisco, where nearly 70% of regional weekday transit trips ended pre-pandemic. Wiener is leading a contingent of legislators and advocacy groups pushing to reinstate the $2 billion and give agencies “bridge funding” to avoid imminent fiscal cliffs.
Understandably, the cash-strapped state may be squeamish about coughing up more money for transit agencies, particularly those that have squandered or misused funds. BART, for example, spent $350,000 on a homelessness program that served one person and awarded a $40 million contract to a San Francisco firm despite a potential conflict of interest. These abuses were uncovered by Harriet Richardson, who recently resigned as BART’s inspector general, accusing the agency’s board, management and unions of stymieing her work. BART is now part of transit funding negotiations in Sacramento with state Sen. Steve Glazer, D-Orinda, who wants to make increased state money contingent on strengthening the inspector general’s office.
Lower ridership since the pandemic on BART and other public transportation systems is pushing them toward a fiscal cliff.
Paul Chinn/The Chronicle 2018
It’s clear that BART needs more oversight. Still, California transit agencies likely wouldn’t be in such a precarious financial position if the state had invested more in their operations all along. Many East Coast states fund a larger portion of their major transit systems’ operating costs than California does, according to a SPUR analysis.
The best solution may be increased state support paired with consistent regional and local funding, affirming public transit as an essential service that brings us closer to our equity and climate goals. The Metropolitan Transportation Commission plans to put a regional transit funding measure before Bay Area voters in 2026, a strategy that has proved successful elsewhere in California: In 2016, Los Angeles County voters overwhelmingly approved a permanent half-cent sales tax measure expected to raise $120 billion over 40 years for regional transit, including for operational expenses.
California also needs to do its long-neglected part to help San Francisco address the behavioral health crisis on its streets. Breed is pushing state lawmakers to pass legislation to make it easier to compel severely mentally ill people into treatment, but — like Newsom’s Community Assistance, Recovery and Empowerment Courts — its impact will likely be minimal without sustained state investments in mental health centers and workers. Newsom wants to put a 2024 bond measure before voters to raise billions for such treatment centers even if approved funds wouldn’t start flowing for years. In the meantime, San Francisco should address the roadblocks that have hampered it from spending the hundreds of millions of dollars earmarked for homelessness and prevented it from filling hundreds of empty housing units.
For too long, San Francisco has been so backward-looking as to make it impossible to move forward. This is at odds with the innovation and creativity that the city takes pride in, and which it needs to foster and unleash if it wants to escape its current mold: a city preserved — stuck — in the resin of the pandemic.
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