Posted on 12/19/2023 9:40:13 PM PST by SeekAndFind
Ever since San Francisco hired a pricey PR firm to help improve the city’s image by placing positive spin in papers like the NY Times, you see a lot fewer articles speculating that the city is in the midst of an urban doom loop. And yet, the PR firm can’t actually stop the bad news from getting out. Case in point, the city’s commercial real estate vacancy rate just jumped up to another record high.
San Francisco’s amount of vacant office space has reached the highest level ever recorded in the city’s history.
According to preliminary fourth quarter data provided by real estate brokerage CBRE, the city’s vacancy rate ticked up nearly 2 percentage points from the previous quarter, reaching 35.9% at year-end. In September, that number was at 33.9%, which was also the previous record high…
With companies still generally giving up more space than they are taking, San Francisco is now on its 16th straight quarter of occupancy losses. But that could change next year.
Compared to where the city was prior to the pandemic, all of this is really bad.
Office vacancy rates in San Francisco hit all-time highs during the pandemic and have continued to break records. The swath of space on the market is particularly striking when compared to the sub-5% vacancies seen in the city before the pandemic. San Francisco has experienced the sharpest rise in vacancy rates of any major office market in the country.
The vacancy challenges are connected to a broader decline in the market values of office properties in San Francisco, which has meant lower tax revenues and a growing municipal budget crunch while leaving some bargains for opportunistic private investors.
That last paragraph above is what moves this from bad news to doom loop story. If you remember a year ago when I first wrote about this topic, it was based on a paper written by a trio of academics. Here’s how they described what might be coming for some of America’s big blue cities:
…the possibility of an “urban doom loop” by which decline of work in the center business district results in less foot traffic and consumption, which adversely affects the urban core in a variety of ways (less eyes on the street, so more crime; less consumption; less commuting) thereby lowering municipal revenues and also making it more challenging to provide public goods and services absent tax increases. These challenges will predominantly hit blue cities in the coming years.
So it starts with a decline in people working downtown, which has clearly happened in San Francisco. That leads to less foot traffic, less commuting and more crime. Is San Francisco checking all of those boxes? Why yes it is. Both Jazz and I have been writing about the retail exodus all year. There’s a map here of all of the closures. All of this in turn leads to a decline in city revenues. As mentioned above, San Francisco is now preparing to make budget cuts:
San Francisco Mayor London Breed is asking departments to plan for budget cuts of 10% in the upcoming fiscal year to help close a colossal deficit.
City budget officials have projected a deficit of $800 million over the next two fiscal years, with spending expected to significantly outpace revenue. The shortfall reflects increased spending alongside high office vacancies, stagnating tax revenue, increasing disputes over business taxes and dwindling federal aid tied to the pandemic, according to the Mayor’s Office.
And this brings us to one of the most critical elements of the doom loop scenario, which is the collapse of public transportation. That disaster has also been looming all year. Back in March, the SF Chronicle reported that ridership was still down and the system was facing major cutbacks.
Its pre-COVID ridership is unlikely to return in the next decade, making BART’s future especially perilous as transit agencies across the Bay Area and the nation project massive budget shortfalls.
In its worst-case scenario, BART would impose mass layoffs, close on weekends, shutter two of its five lines and nine of its 50 stations and run trains as infrequently as once per hour. Those deep cuts, agency officials say, could lead to the demise of BART.
A Bay Area without BART, however unimaginable, would further fragment public transit, worsen traffic congestion on highways and bridges, and erode the natural flow of a region so profoundly shaped by the rail system.
If the public transport system shuts down that would really ratchet up the doom loop. Even fewer people would make the trip downtown and more businesses would close, etc. But the pandemic money that has kept BART going will run out soon and that means the city was in need of a new source of funding to keep alive the possibility of a gradual recovery.
Local lawmakers did in fact plead with the state for additional money and got some help from a NY Times opinion columnist. The state apparently saw the light, i.e. having one of its major cities go full doom loop would be bad news. So California offered up $5.1 billion for public transport. Gov. Newsom actually signed the budget proposal while riding a BART train to make the point. But as you can see, Newsom is also aware that things have changed since the pandemic and it’s not clear we’ll ever be going back to the way things were before.
With this budget, we’re investing $5.1 billion in public transit—so services like @SFBART can better serve Californians now and in years to come.
We're increasing our budget reserves to record levels while preserving historic investments together with the Legislature. pic.twitter.com/abcGpqhLpG
— Office of the Governor of California (@CAgovernor) June 28, 2023
It turns out the state really didn’t have that money to spend. In fact, California is facing a $68 billion budget deficit over the next couple years so San Francisco (or other cities) won’t be able to go back to the well anytime soon.
The bottom line is that the urban doom loom in San Francisco is resting on a knife’s edge at the moment. The city and state are trying to hold it back by propping up public transportation because that really could be the last straw for downtown, but it’s not clear if the money will hold out long enough for the ridership to recover. That’s really another way of saying it’s not clear how long it will take for downtown to recover. And what would recovery even look like at this point? I’m not sure anyone knows.
I don’t want to suggest doom and gloom is the only possibility here. Excess vacant office space means companies are adjusting to the new normal which is healthy. It also means the price of office space in San Francisco keeps dropping. At some point, someone will find it cheap enough to sign a lease for a startup that couldn’t have afforded SF real estate five years ago. And some of those businesses will succeed. The invisible hand takes away but it also gives.
SF has a lot going wrong at the moment, but it still has beautiful views, a great climate, lots of educated young people and a history of being near the cutting edge technology that runs the world (including AI which is the new thing taking off in Silicon Valley). Frankly, if the city could clean itself up a bit (something the mayor and DA are trying to do) it’s hard to see how it can fail long term. People will always want to live and work there unless the social conditions make it impossible.
Ten years from now (or maybe sooner), I think SF is probably doing pretty well. The question is really how dark the darkness gets before then. How much creative destruction is going to be required to make it viable again, a little or a lot. The answer to that may all come down to BART trains.
Send most of the homeless to those dark, empty castles.
Of course, then the Mayor would need to budget an on call clean up crew, armed security force and indoor health clinic or should I say, de-tox clinic.
Wistling past the graveyard. What is really required is for the city to clean itself up. That would require tough policing, something I can't see happening until things get a lot worse.
Three things I get out of this trend: (1) A lot of the talk is over commercial real estate (office buildings). I would imagine in 2024...several more hotels will shutdown, with tourism lessening every quarter (even international tourism will lessen). (2) Going into early 2025, after they let go of 10-percent of city staff in 2024...there’s probably a rough 20-percent additional cut to come. (3) Finally, you would have mandate people go to a enclosed/fenced facility and ration out real drugs (freely) to get them off the streets of the city (Democratic logic) to bring real change or fix this mess.
The Democrats are not going to tolerate tough policing right now. Remember the cops are racist.
Approx. 30 years ago I worked in downtown S.F., and frankly the seeds of the “doom loop” go back a lot further than many realize. In a lot of ways, this has been a long-term decline that was largely “papered over” by a tech/startup boom that have supplied a steady stream of boom/bust office tenants for the past 25 years.
Allow me to explain... ~30 years ago, downtown S.F. was the headquarters of a half-dozen or so really big, traditional companies that each employed thousands to tens of thousands of workers: Chevron (aka Standard Oil), Wells Fargo, Bank of America, Pacific Telephone, Pacific Gas & Electric, Charles Schwab. Bechtel. Through various mergers and moves, every single one of those companies’ headquarters eventually moved out of S.F., with maybe 80-90% of their erstwhile workforce gone. Yes, the Twitters and Ubers and Airbnbs came in and hundreds of lesser imitators rolled in, but it wasn’t the same thing. The tech companies and their workers come and go. It’s a totally different thing than the Chevrons and Wells Fargos that had the same boatloads of people working there for 20 or 30 years. We can talk about the crime and the drugs and all that stuff has hurt, but the fact is that SF cast its lot with a startup-tech industry that has proven unreliable over the long term.
The commercial death spiral will continue. They have nothing to inspire revitalization. Investment opportunities? Ha! Only cheap rubble for concrete crush as roadfill.
And who wants to haul crush hundreds of miles to an active economy?😍
PR firms 1st mistake, use The NY Times to “sell” SF to people who could possible help. Liberals are the problem, not the solution….. Of course I don’t know any conservatives who would move there…..
“”At some point, someone will find it cheap enough to sign a lease for a startup””
The only ‘startup’ that has any chance of succeeding would be Pooper Scoopers, Inc. No one else wants to ‘invest’ any $$$ in that cesspool.
Detroit was once a great city. Now the forest is slowly returning.
Civilized chaos, such as at our southern borders right now.
What shocks me is that 64% of the office space remains filled!
Unless much of this is contracts leases that have not yet run out.
Your observation is true for dozens of cities across the USA. Our politicians and business leaders sold out the country.
I’m surprised Robin Hood Biden and his merry band of fairies haven’t forked over a few billion yet. He still has a year, so it is probably coming. The demented one forked over 3 billion last month for the train to nowhere boondoggle and another 3 billion for a train from So Cal to Vegas. No doubt Newsome and the SF mayor have their hands out on behalf of BART
When the real estate industry measures occupancy and vacancy rates, commercial space is considered “occupied” as long as there is a lease in place — even if nobody is using it and the lights haven’t been turned on in months. SF’s office occupancy rate will continue to decline as more and more leases on these unused offices expire.
And some stores to loot.
Somebody in that leftist city government will soon get the bright idea to convert all that office space to homeless living quarters. It’ll be great. Then they could have all the sh!tters indoors in the hallways. It couldn’t happen to a more deserving city.
Move the UN there.
“That would require tough policing”
That train has left the station (so to speak).
Lived in San Francisco from 1994-2016, beautiful, fun town, but no longer.
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