Is San Francisco caught in a "death spiral"?

This is a tough time to be either a business person or politician in San Francisco.

It’s been well-publicized that the city has a huge budget problem and is the slowest market in the country to recover from the pandemic lockdown. The sorry secret is that it’s unlikely to ever recover.

Nationally, remote work and hybrid schedules have hollowed out job centers everywhere, but it’s far worse in San Francisco where tech companies have had huge footprints of class A office space. The vacancy rate now is about 30% or 35 million square feet as companies shed space, walk away from leases and re-evaluate their needs and costs.

For building owners, the situation is dire. Nationally, owners are getting squeezed between leases , loans that typically reset every 10 years, values that have fallen sharply and interest rates that have skyrocketed as the Federal Reserve has raised them to battle inflation. Some recent transactions have shown just how far values have fallen. Last month, a 22-story building at 350 California sold for 75% less than its asking price in 2021.
Another driver of the San Francisco economy is tourism and the convention business. Tourism, particularly from Asia, has been slow and conventions have gone elsewhere—staying away because of the homeless and drug scene in San Francisco to say nothing of the costs.

That reality led to the East Coast real estate trust that owned the two largest hotels in the city, the Hilton at Union Square and the Parc 55, to walk away from the properties that were secured by a $725 million loan. The trust cited the lack of business travel and the convention business reality as the underlying reasons for the decision. They were valued at $1.56 billion when the loan was made in 2016.

And, then there’s the rapidly deteriorating retail. Union Square, once the shopping hub of the city, is about 14% vacant and Powell Street, with its cable car line, has more vacant storefronts than occupied ones. Throw in that Nordstrom is closing both its showcase store on Market Street and its Nordstrom Rack across the street as well as other national and international retailers not renewing leases and it’s an ugly picture.

San Francisco revenues, be they hotel tax, property tax or sales tax, all are headed south. The city’s budget is about $14 billion and the anticipated shortfall for the next fiscal year is $291 million.

Fortunately, here in the valley, we don’t face most of those challenges, but remote work is having an effect on office buildings here. We’re fortunate to have a strong and expanding health care base here with Stanford ValleyCare, Kaiser, John Muir and Sutter all with significant footprints. Stanford, in particular, is expanding aggressively, buying three buildings in Hacienda Business Park earlier this year.

The big shift for many of us is thinking three or four times about whether we want to venture into San Francisco for a special occasion—that used to be a no-brainer.