Posted on 09/06/2022 8:20:01 PM PDT by SeekAndFind
I first wrote about the exodus of workers from San Francisco back in January of 2021. That trend was driven partly by the high cost of living in the Bay Area, partly by the rise of crime and homelessness and partly by the fact that the pandemic made working from home the new normal for a lot of white collar workers.
It’s not just individual workers who are leaving the city, entire companies have decided to downsize their footprint downtown. Again, there are multiple reasons why this is happening now but the bottom line is that San Francisco office space isn’t as appealing as it used to be. According to the San Francisco Standard, that means the city itself could be headed for a commercial real estate crash.
The root of this—of course—is the pandemic and the way that it has completely transformed work patterns in the city, hollowing out a downtown core that once accounted for most of San Francisco’s GDP, 70% of its sales tax revenue and 40% of the city’s jobs. And there’s an uneasy feeling among a coalition of business groups that city leaders are sleepwalking into an economic calamity with far-reaching consequences.
Signal lights of the city’s tenuous fiscal future are starting to flash. Major tech employers like Yelp and Airbnb have fled or gone fully remote, leading to mass office vacancies. A swath of commercial landlords are seeking massive reductions in their assessed property values—and associated tax bills. And a recent report from the Urban Displacement Project ranked the city’s downtown recovery as dead last among more than 60 cities across North America.
In February I wrote about the concept of “peak office.” The idea is simply that with white collar workers pushing to work from home on a more permanent basis, some companies are now downsizing office space to match the demand. But because commercial office space rentals usually involve multi-year lease agreements, that change doesn’t happen overnight. I given company may be locked in for a year or several before they are in a position to negotiate for less space. And that matters because it suggests the impact of peak office hasn’t really been felt yet.
…a slew of office leases signed at the height of the city’s economic boom are poised to expire over the next few years, further inflating vacancies and diminishing what the office towers that draw the city’s skyline are worth. There’s currently more than 25 million square feet of commercial space available for lease or sublease in the city, the equivalent of about 35 Transamerica Pyramids sitting empty…
Citing data from real estate firm JLL, SF’s chief economist Ted Egan tagged future vacancies, in a worst case scenario, as high as 53% in the Jackson Square area and 43% in the mid-Market area in 2024 as the clock runs out on office leases.
In short, things are bad now but there’s every reason to think they are going to get a lot worse in the near term. As those buildings empty, the value of real estate city wide is being driven down and the ability of owners to pay there property taxes drops.
In California there’s another wrinkle in this story called Prop 13. Prop 13 limits the amount property taxes can increase in a given year to 2%. For older properties this means they are probably already paying rates that are well below the actual market because property values in California have been growing at way above 2% a year. So when values drop, as they are now, long-time owners aren’t really over-extended, i.e. they’ve been underpaying thanks to Prop 13 and now the actual values have dropped closer to what they pay. But the situation is different for new construction. Their values may be based on what things are currently worth so when the market drops they are now overpaying. In any case, the city can probably expect a lot less income over time. Even their current estimates may be too optimistic.
The city’s most recent budget forecasts estimate that office workers will telecommute 33% of the time when an in-person return to the office stabilizes. That number seems strikingly optimistic compared to data from key card company Kastle Systems indicating that SF’s downtown offices are only about 30% full…
The city’s budget office expects property tax revenues to continue to grow. But Howard Chernick, an economics professor at Hunter College and co-author of the report that forecast an up to 43% decline in SF’s property values, paints a much worse picture: His team sees a decline of up to 15% in property tax collections amounting to a roughly 4% drop in total revenues.
That works out to something like $240 million per year, money that the city won’t have to spend not to mention the expected growth in revenues that the city has built into its assumptions. I don’t want to get my hopes up but the deep blue city that recalled it’s woke school board and it’s far-left district attorney may now be starting to think seriously about the need to cut taxes. If you’d asked me a decade ago if that would ever happen I’d have have said no chance but the world has changed, partly because of the technology created in Silicon Valley and now San Francisco is going to have to change with it.
Then the Chinese swoop in and buy it all for pennies on the dollar.
Just wear a flower in your hair.
Convert it all into free housing for the homeless. San Fransicko can choke on ‘em.
The Chinese are having their own real estate meltdown, as well as economic problems.
If they own it, they dont like the LGBT crowed. It wouldnt work I dont think.
make the city unlivable...
who knew?
but keep voting dem
That is not a problem.
If Congress remains in democrat hands - and maybe if it doesn't - California with its large Congressional delegation can create a pretext for the federal government to send them an Iranian-size pallet of cash.
Of course, that may require bribes to other cities and states but history shows a trillion dollar spending package once or twice a year is not impossible.
And it won't hurt taxpayers or consumers because only federal government money will be spent.
Oh, heavens, the leeches aren’t getting as much blood. They helped destroy businesses and lives. F them.
I heard that Realtor.com and Zillow are airbrushing feces and tents out of photos of SF properties. ;)
Yep. Between Chinese buyers, BlackRock, and other corporate buzzards, Americans will not be able to own a home at all in a few years. You will own nothing and you will be happy.
It’s not just San Francisco either. This is happening in every major city. Who do you think those in Portland are selling to when they abandon the city? It’s not a middle class person looking to move there for the job opportunities.
You nailed it.
I think they need an injection of sanctuary citizen types from Texas and Arizona. Their fair share of undocumented immigrants should solve their problems!
It was fun to work in downtown SF (Four Embarcadero) in the 1980’s and 1990’s. Bike messengers everywhere, skateboarders going fast, men and women in professional suits walking across the streets, and coffee shops. It was high powered and cool. Sadly, today the bike messengers are gone, the skateboarders are in the Sunset District, numerous tourists and shoppers walk around downtown, and there is a coffee shop with a robot. The 2020 covid hoax proved that many liberals are just cowards. Working at home is so much better that working in an office full of cowards. From the article: “Supervisor Catherine Stefani sent a letter of inquiry asking budget officials to quantify declining demand for commercial space.” Unreasonable person. News flash to Stefani: the quantity of demand for space in SF can be found in thirty seconds on a google search. You will need a computer to do the search.
What doesn’t make sense over the short-term is that companies budgeted to pay those lease amounts. If employees work from home, the cost to the company does not increase. Their overall cost to keep the building running has not changed.
What changes immediately is the vast amount of small businesses that cater to the workforce that disappeared. Restaurants, shops, bars, cleaners, salons, parking garages, car repair shops, etc. will all get clobbered (already are). That makes the downtown areas an uninviting wasteland (even without the vast armies of bums and druggies fouling the cities) and makes it less likely people will want to return to the office. If you don’t have a vibrant and inviting downtown, people won’t want to be there.
Over the long-term, as leases expire, office vacancies will soar.
Of course, lots of companies in the past few weeks have told their employees “ENOUGH! Get your butts back in the office.” We’ll see how that plays out.
Joe will print them anything they ask for.
Couple points you may have missed -
1. Right now, if everyone’s working from home, their cost to keep the building running *has* decreased. Power usage, water usage, lower climate control loads, general facilities maintenance maintenance, telco (but not internet provider) costs - all of those have gone down as a result of Work From Home. And most employers are finding their per employee productivity is actually way up.
2. Given that it’s the Bay Area, depending on when the contract was signed, it may make financial sense for a firm to just break the lease early, pay the penalty and rent a much smaller space, or rent space in a datacenter plus a shared office facility for the few times you need a physical office.
3. Recalling employees to the office after extended WFH is *not* going well for a lot of employers.
Its like this in Banking elsewhere.
The banks are trying to force everybody back to the office on at least a hybrid basis. They can do that with people in the early phases of their careers and with H1Bs. Those who have experience or job skills that are in high demand simply refuse. The banks then have to bend to their will or they can try to be stubborn but that means they just don’t get the employees they most want because some other bank will agree to those terms - trust me, I know this from personal experience.
The next phase WILL be people moving out of big expensive cities to enjoy a higher quality of life in smaller cities, towns, exurbs, etc. So in the short and intermediate term commercial real estate in those places will crash but over the long haul, residential real estate is going to go down to. Looking at you San Francisco, New York, etc.
I’m in banking so I can speak to this industry. It goes like this:
Bank demands employees return to office.
Workers early in their careers sigh and accept it knowing they have little choice. H1B’s really have almost no leverage so they all go back.
The executives, the experienced hands banks regularly bring on to do projects (that’s me), those with specialized knowledge or skills that are in demand in the industry say “Eff you. No.”
The banks then have to decide: Do we want these people who actually know how to do a lot of these specialized projects or do we want to try to be stubborn about it and insist things be on our terms exclusively?
If its the latter, then they are finding they simply do not get the people they want, because other banks will agree to allow those people to work from home like they’ve been doing for two and a half years already. That’s where we are right now. The next step is those banks which tried to be stubborn are not going to be able to get their critical projects done, things like MRA (Matter Requiring Attention) projects to satisfy federal regulators are not going to be met and the banks will then be looking at sanctions from the regulators. Then they will cave in and allow the people who know how to do critical projects to do it remotely. They have no other choice. You can’t simply snap your fingers and replace CPAs/MBA’s with 15-20 years experience in the industry. There aren’t enough of them.
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