The San Francisco skyline. Justin Sullivan/Getty Images
- Commercial real estate landlords are abandoning once prestigious properties in San Francisco.
- A lack of hope among property owners is due to office vacancies, but crime also plays a role.
- Expect the downtown downturn to get worse before it gets better, Manus Clancy von Trepp said.
The crash of downtown San Francisco is progressing rapidly.
Landlords big and small are waving the white flag amid mounting pressures the city is facing, in part due to the downsizing of some of the largest employers and the inertia of remote work.
In May, foot traffic to San Francisco offices fell nearly 60% compared to 2019 — the largest shortfall among major urban centers in the US tracked by Placer.ai, and it shows. According to the San Francisco Chronicle, the city’s 18 million square feet of vacant office space is large enough to house 92,000 people.
Since April, the office tower at 350 California Street has sold for a worrying 75% less than its pre-pandemic estimate. The owner of the flagship Hilton San Francisco Union Square and nearby Parc 55 turned over the keys to his creditors instead of trying to pay off a $725 million loan. Days later, Unibail-Rodamco-Westfield and co-owner Brookfield returned San Francisco City Center to their lenders after the mall was down to just over half occupancy after retailers moved out.
The capitulation of some of the most sophisticated real estate players following tech job cuts and the increasing permanence of remote work is a dark omen for the city’s downtown. Property defaults have been expected for a long time, but not all of a sudden: Many investors thought they would happen when owners took out options to extend the terms of their loans, which could lengthen their losses.
Even more troubling, the loss of workers, the business travelers they are attracted to, and the stores they shop in is creating a vicious cycle that is unlikely to be broken anytime soon, said Manus Clancy, chief executive officer at Trepp, which tracks and manages the company commercial real estate debt.
“San Francisco is in a hole in the ground that’s getting bigger by the day,” Clancy, who lives in New York, told Insider. “Shop closures, crime and other quality of life issues are creating an epidemic of negative headlines that keep tourists and workers away. It will likely get worse before it gets better.”
A wave of downsizing by big tech companies like Snap, Meta, and Salesforce helped the city’s office vacancy rate jump to nearly 30% last quarter, up from less than 5% three years ago, according to CBRE. The workers who remain employed have resisted the long commutes that are common in the peninsular city, data from Placer.ai shows.
Last quarter, only 36% of workers commuting to San Francisco offices commuted more than 5 miles, with the lowest percentage of long-distance commuters making the return trip to cabins in Boston, Chicago, Houston, and New York. as the data show. But for workers who live closer to their San Francisco offices, the percentage who have to commute daily is relatively high.
The good thing about vacancies: Space for startups
Some of these workers are likely among the explosively growing generative AI startups in San Francisco, with about 22% of them concentrated in the region. The founders of Krea, which develops models for high-quality imaging and asset management services, packed their bags in Miami last year and headed to San Francisco’s Hayes Valley neighborhood, not far from Union Square, for a haven transformed for businesses like yours.
But because startups are inherently small, they can’t make up for the population drain. According to the Census Bureau, fleeing the city reduced the population by more than 65,000 people from April 2020 to July 2022.
As housing demand slumped, average house prices, which have been buoyed up during the pandemic, are down nearly 18% for the year through April, nearly three times the drop in Manhattan. As for rentals, landlord Equity Residential has “limited pricing power” in the downtown market and is making concessions to attract renters, the company’s chief operating officer said on a conference call in April.
Jeff Burg, a real estate investor who has been buying and renting small apartment buildings since 2002, said he has abandoned the city, citing onerous regulation.
“I sold all of my rentals in San Francisco over the past year and have finally moved out with my family,” Burg told Insider via LinkedIn. “After 23 years we move on with our lives. Whatever is going on in San Francisco, we have no interest in being a part of it any longer.”
The city is characterized by the fear of crime
Crime, or the fear of it, often creeps into conversations about San Francisco as well.
Thomas Baltimore, the CEO of Park Hotels & Resorts, which gave up Union Square hotels last week, said in a statement that “road conditions” were adding to record-high office vacancy rates, adding to the increased strain on properties. Some neighborhoods — including the Tenderloin District, which borders Union Square and Westfield Mall — had higher homicide rates this year, although San Francisco’s homicide rate is at the lower end of major cities citywide, according to ABC 7.
According to the San Francisco Travel Association, crime doesn’t seem to have held tourists back, with numbers up 29% last year to 21.9 million and expected to reach 23.9 million this year.
Still, there are signs of crime everywhere in San Francisco. Assaults and robberies have risen while rapes have fallen, ABC 7 recently noted. And social media posts, including one from Elon Musk denouncing “horrific” violent crimes following the stabbing death of tech executive Bob Lee in April, are adding to the fear.
A Whole Foods market in the Mid-Market District — also near Union Square — experienced a crime wave so widespread that managers simply closed the store in April after it opened last year had been opened. According to the New York Times, 568 911 calls were received from the store over a 13-month period, many related to violence and drug use.
A commercial real estate agent, who asked not to be named, told Insider that on a recent family trip to town, his tour guide said the tenderloin had become so poor that cops were being paid more to keep the beat. People affected by homelessness have long congregated in the Tenderloin neighborhood, while the number of homeless people across the Bay Area has risen 35% to 38,000 since 2019, McKinsey & Co. found.
Frank Scavone, a veteran commercial real estate debt investor who is now a managing partner of Third Point Real Estate Strategies, pondered why the workers weren’t coming back, but was more certain of the result — plummeting building values.
“I wonder what the reason for the openings in San Francisco is,” Scavone told Insider. “Is it because nobody feels safe in downtown San Francisco? Is it because the ground-level merchants and amenities associated with downtown have disappeared because of crime?”
He continued, “Is it because downtown San Francisco is a little harder to get to from the Marin County suburbs or the East Bay?”
“Taken together, these issues set the stage for workers to say, ‘We don’t want to be there because we don’t feel safe, it’s not a comfortable work environment anymore, or we feel like we’re entitled to another work week. ‘ design,” he said.
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