After a 21st-century gold rush created by big tech, downtown San Francisco is going to have to reinvent itself. Again.
The city of undulating streets, panoramic views, and booms and busts is now facing a major economic upheaval, as persistent crime, homelessness and high costs are keeping many tech office workers away, and making tech companies rethink their offices. While the city is lately portrayed as going through an apocalyptic descent into hell, this is really just another bad bust cycle for a downtown core that has experienced many before.
After a host of companies moved out in the 1980s, San Francisco saw the beginnings of an economic rebirth in the mid-1990s, when it became the hipper outpost of Silicon Valley, beginning with the dot-com boom with startups renting former industrial spaces in the then-low-rent South of Market district.
But the city became an extension of Silicon Valley for the first time in the past decade, as a generation of startups like Salesforce Inc.
CRM,
Twitter Inc.
TWTR,
Pinterest Inc.
PINS,
Uber Technologies
UBER,
and Airbnb
ABNB,
grew up, went public and stayed in San Francisco’s Financial District or nearby environs, as the city became a major hotbed of new tech, rivaling the Valley for software and mobile-app companies.
An even bigger change came from a massive influx of tech workers. So many tech workers decided to live in the city that Valley giants like Alphabet Inc.
GOOGL,
GOOG,
opened offices there, and shuttled their workers to offices in sleek but reviled buses from their San Francisco residential neighborhoods down the Peninsula to Google, Apple and Facebook headquarters in Mountain View, Cupertino and Menlo Park.
But as housing costs climbed, and homelessness and crime increased everywhere, the pandemic fueled a migration of about 7% of San Francisco’s population, or around 59,000 residents, to more affordable cities from April 2020 to July 2021, according to U.S. Census Bureau data. Cities like Atlanta and Miami are becoming new tech centers, and rural towns in Montana and Wyoming are attracting dispersed tech workers and bosses. Even cities in the surrounding region such as Oakland, Berkeley and into the Sierra Nevada, are benefiting.
Now tech companies are joining their workers, scaling down their presence in San Francisco, shedding office floors and keeping a smaller, almost satellite presence in some cases. Sentiment in the city is depressed, as crimes caused by opioids and homelessness have turned many residents, possibly for good.
A recent poll by the San Francisco Chronicle found little hope among citizens in the city’s ability to fix its chronic problems, with most of the 1,653 people surveyed expressing worry, frustration and pessimism. But the mood is no better in the real Silicon Valley, where more than half the residents said in a recent poll that they plan to leave the region in the next few years, unchanged from last year’s poll.
San Francisco’s worker problem, though, is putting its economic engine — the downtown core — at risk. Karen Chapple, director of the School of Cities at the University of Toronto and professor emerita of City & Regional Planning at UC Berkeley, led a group of researchers to study economic recoveries of downtowns across the U.S. since the start of the pandemic.
San Francisco came in dead last.
“There will always be some interesting new tech phenomenon in San Francisco,” Chapple said. “Because of the nature of the beast and the smart people and the culture, it’s a magnet, but I don’t think you will see a huge scale-up anymore, with the Big Five taking millions of square feet in downtown San Francisco, I think that is probably over.”
Kelsey Bishop, founder and chief executive of Candor, a startup professional network to help co-workers connect in a remote environment, agrees. Bishop left San Francisco in 2021 and now divides her time between Lisbon and New Jersey, mostly working remotely.
“I think San Francisco is going to have a hard time recovering from this,” she said. “What we have seen, whether it is a hybrid model or not, people want to live in beautiful places…Why work in downtown SF? I frequently heard gunshots out there, I remember huddling under my desk because there was an active shooter outside.”
How the pandemic slapped San Francisco
The pandemic-era vibes dissipated last month, when San Francisco got a nice little economic boost from Salesforce Inc.’s
CRM,
Dreamforce, the largest in-person tech conference since the pandemic began. Many of the 40,000 attendees celebrating Salesforce and its products were spending money downtown in hotels and restaurants.
While the feeling of a bustling downtown was a nice diversion from the emptiness that the Financial District has largely felt during the pandemic, it was only a temporary infusion into San Francisco’s economy.
The city’s downtown Financial District and South of Market have some of the lowest office attendance rates in the U.S., and San Francisco’s commercial office vacancy rate was 23% in the third quarter, according to Cushman & Wakefield Research, the same level it reached in 2003 amid the fallout of the dot-com bust. Data from the UC Berkeley researchers indicated that Salt Lake City; Bakersfield, Calif.; Columbus, Ohio; and Fresno, Calif., were the top four recovering cities, based on cellphone data of workers returning to the office. More recent data since Labor Day from Kastle Access Control Systems, the card key entry company, found 39.7% of workers in San Francisco offices were back in the office, up from 14.7% a year ago. That data is compared to a pre-COVID baseline, Cushman & Wakefield noted.
A pedestrian walks down a quiet California Street in the Financial District of San Francisco on May 9.
Bloomberg News
SocketSite created a graphic of the amount of empty office space in San Francisco, showing the equivalent of 13.8 Salesforce Towers — the 1,070-foot-high skyscraper towering over downtown — is sitting unoccupied, based on 18.7 million square feet of vacant office space in the second quarter, including 5 million of sublease office space on the market. In the third quarter, that number grew to 19.9 million square feet of available space, according to Cushman & Wakefield.
“We need to re-envision how the city is structured,” said Jennifer Stojkovic, executive director of sf.citi, a tech trade association. “I think there has been a large number of legislative officials who have not taken the downtown recovery seriously. Most people were banking on things recovering by now.”
San Francisco’s proposed $14 billion annual budget is estimating an almost 6% drop in business taxes, to $902.3 million in fiscal 2022-’23, from $957.1 million in 2021-’22. But the city will make up those lost funds with an estimated $60 million in taxes from the newly enacted executive pay tax, a measure that sf.citi fought against.
“San Francisco has a Frankenstein tax system,” Stojkovic said, adding that all the recent tax measures voted on by the city were during boom times. “It was all based on the longest bull market in 100 years. We said we cannot keep adding all these taxes.”
The city is projecting that both sales taxes and hotel taxes will grow this fiscal year, but those numbers could prove to be optimistic if more business does not return. Another looming potential revenue loss, albeit temporary, could come from property owners who are appealing their property assessments with the city, arguing that their property taxes should be reduced to reflect lower assessed property values. Ted Egan, the city’s chief economist, said that there has been a large number of appeals filed, but they have not been heard yet. He noted that the reassessments are mostly being filed by newer property owners, who bought buildings in 2019, for example.
Based on the amount of office space available, a lot of tech may be gone for good, or stay with a vastly reduced presence. For example, in August 2020, Pinterest canceled its plans to lease 490,000 square feet in a downtown office building under construction near the CalTrain transit station, paying $89.5 million to cancel the lease. Instead, it is keeping its nearby headquarters. Oracle Corp.
ORCL,
which moved its headquarters to Austin, Texas, from Redwood City, Calif., subleased four of its five floors in San Francisco, or about 86,000 square feet.
A failure to act
There have been some discussions on how to remake parts of downtown, or include more culture and arts. But San Francisco Supervisor Ahsha Safai, who represents District 11, which includes southeastern residential districts but not downtown, has been one of the more cautionary voices trying to get the city to wake up. He said the issues downtown have a spillover effect, hurting union workers, such as janitors and hotel workers, and small businesses, to name a few.
“All this has a massive ripple effect on our economy,” he said. “We can’t just hope that people are going to come back to the office.”
Safai organized a couple of sessions of the Board of Supervisors’ Land Use Committee to discuss the problem over the past year. This month, he proposed a working group to focus on the problems, saying it is essential to have an “honest conversation” about how to reinvent the downtown core.
“There might be some land-use changes. We might need to allow more conversion of buildings to residential, convert more to entertainment,” Safai told MarketWatch. “But we have to go through that process of change, determine what level of office needs to be preserved and what needs to be transitioned.”
Many in the real estate community, though, see the city keeping its status as a tech center. “There is some concern about the future of the leasing market in San Francisco,” said Bill Cumbelich, an executive vice president of CBRE in San Francisco. “With some tech companies going completely remote, questions rise there, but I have to say now that San Francisco has established itself as a tech city, it is very good for the city going forward, compared to where we were in the ’90s.”
Cumbelich recalled the 1980s, when companies like Bank of America
BAC,
Chevron
CVX,
and Pacific Bell moved their headquarters out of the city, as a real stagnant time, until tech began to emerge as a new industry in the mid-1990s.
“Since that early ’80s exodus, before that I don’t think we had seen those types of big shocks to the office market,” he said.
Cumbelich believes that the so-called Class A property buildings, such as 140 New Montgomery, the former headquarters of Pacific Telephone and then AT&T, will fare well in the current upheaval. Last year, Yelp Inc.
YELP,
did not renew its 14 floors, or about 162,000 square feet of space, in the building, but some of that has since been leased, Cumbelich said. He said many building owners are currently engaged in an “amenities arms race” to fix up their buildings to attract new tenants, adding that some of 140 New Montgomery’s features — like its garden courtyard, bike parking and gorgeous lobby — attract tenants and their workers.
“There are a lot of lobby refreshes going on, exterior decks, conference centers, activation of lobbies, lot of upgrading and improvements going on,” he said. “A lot of offices are adopting a hospitality focus, having things that are appealing like a hotel would…to make it more appealing for workers.”
Indeed, some areas of downtown are busier. Some lunch restaurants have reopened since the pandemic, and there are more people walking in the streets during the day. On a Monday night after Dreamforce was long over, it was busy at Tadich Grill, one of the city’s oldest restaurants. But it’s still not like it was, and some businesses are still seeing a huge drop in revenue.
“Our hours are reduced,” said Steve Sarder, co-owner of Ladle & Leaf, a popular family-owned soup-and-salad restaurant chain. “The locations that used to be open for breakfast are no longer open for breakfast.” Ladle and Leaf closed three of the 13 locations it had prior to the pandemic.
Pedestrians walk by an empty Financial District restaurant on Aug. 25, 2022 in San Francisco.
Getty Images
“We are down 65%. It would be worse if it weren’t for so many restaurants being closed. When I look at the traffic in the buildings that we occupy, I think the downtown traffic is around 25% of what it was, pre-pandemic.” When workers only come downtown to the office once or twice a week, they are only spending a fraction of what they used to on a daily basis, he noted.
“That doesn’t make the economic core a vibrant community,” Sarder said.
“The changes we went through with the pandemic are somewhat permanent,” said Jeb Miller, general partner in Icon Ventures, a venture-capital firm with offices in Palo Alto and San Francisco. “About half of our portfolio companies have an office-space location and are fully remote. But that kind of hybrid state of one or two days in the office seems to be where we are heading.” Miller said that in the South Park neighborhood, for example, where his San Francisco office is located, things are happening, even if remote and hybrid work are becoming a permanent way of life.
“You see kids coming back, entrepreneurs and VCs are out on the lawn, I think that’s the first place that will recover,” he said. Miller remains optimistic about San Francisco. “I think S.F. will still remain the heart of innovation, we have a lot of success that fuels the flywheel of giving back. Talent that is here, that helps the next wave of companies. I think our tolerance for failure here is high, there is a lot of experimentation. There will be some creativity, companies sharing office space, probably a little more reduced footprint, a more creative use of space.”
Egan, the city’s chief economist, believes that working from home is still evolving, and is very fluid, and could change on a dime.
“A recession could change the mood for work from home,” he said. “Employers could change. If the market loosens up a lot employers will be a better bargaining position. Ultimately companies have to be productive…it’s far from settled.” However, if the current situation does become as permanent as some VCs and entrepreneurs believe, “it could have a big shock on property values.”
Indeed, according to CEOs interviewed for a study by KPMG this week, over 50% of them are considering job cuts over the next six months. In a separate survey by beautiful.ai, a majority of managers (60%) said remote workers would likely be among the first to go.
But as seen in the Chronicle poll, the dour look at crime and safety in the city pervades many viewpoints.
“You have become a victim of your own success,” said Robert Ackerman Jr., managing director and founder of AllegisCyber Capital, who sold his home in the city’s posh Pacific Heights neighborhood and moved to Wyoming two years ago. Doing a renovation on his building with a scaffolding required a 24-hour security guard. “I live on airplanes so I can live anywhere…I just saw the steady decline of quality of life in the city, it’s not for me.” Ackerman said some of his investments have been taking him frequently to Maryland, where there are an increasing number of cybersecurity startups, founded by engineers who got their start at places like the National Security Agency.
Ackerman believes that the old adage for entrepreneurs that you had to be in Silicon Valley or San Francisco to start a company is no longer true. “Once upon a time Silicon Valley had the whole game, that is not true anymore.” He said other cities that have been attracting entrepreneurs do not have all the whole ecosystem that has been in place in the Bay Area for decades: mentoring, access to capital, legal services, stellar talent from top universities — but that infrastructure is coming.
Recent Cushman & Wakefield and PitchBook data indicate that funding for San Francisco-based startups is on the wane as well. In the third quarter, San Francisco-based startups raised $5.5 billion, down 48% from the second quarter.
“I am relatively bullish on the Bay Area, but I am also bullish on other cities rising further than they have in the pandemic,” said Gaurav Gupta, a partner at Lightspeed Ventures. “Founders want to be around the founders of their peer [companies], who they admire; they also want to be near where the talent is. And finally they want to be near their investors.” He said he has seen a few companies opening up offices in San Francisco, as a home base or a place to host company events. He said deal cycles are a bit slower now, and pricing is coming down too.
“Things were extremely concentrated in San Francisco for many, many years,” Gupta said. “That does get more distributed to these other hubs, including New York.”
One possibility some have discussed is whether large building owners will look into converting all or some of their office towers for residential use, as some cities have done, such as in New York’s Battery Park City and downtown Los Angeles. But for building owners, converting an office building, especially the more contemporary ones, to apartments or condos would be a costly and unprofitable proposition.
“I think it has potential on a limited basis,” said John Bryant, chief executive of the Building Owners and Managers Association of San Francisco. “People thinking a mass conversion is going to solve the problem is shortsighted. I don’t think it’s technically or financially feasible.” He pointed out that some of the big challenges are the floor plates of big office buildings, and the tall glass windows in so many skyscrapers.
“How do you break it up, versus an office environment?” Bryant said. “You will probably lose 10-15% of rentable square footage. What is the premium I am going to get on residential? It’s not going to be much higher.”
Moscone Center was busy with 40,000 attendees in September for Dreamforce
Therese Poletti
The past shows that the future is not hopeless
San Francisco has rebounded from hard times before. The flag of the city has an image of a Phoenix, the mythical bird that rises from the ashes, which has often been thought to reference the city’s emergence from the devastation of the crippling 1906 earthquake and fire, but likely actually stemmed from the early fires of the early 1850s and its frequent rebirths after the 1849 Gold Rush.
But the bounce-back from the 1906 devastation had powerful business leaders behind it, including French immigrant, department-store magnate and philanthropist Rafael Weill, who led a group of merchants to find and open temporary store locations while their stores were being rebuilt.
The city currently lacks any vocal or involved tech executives who are passionate about San Francisco. Marc Benioff, the co-founder and co-CEO of Salesforce.com, who was once bandied about as a mayoral candidate, now seems more focused on employee retreats near Santa Cruz and his life in Hawaii, rather than on what ails San Francisco. Salesforce, the city’s largest corporate employer, canceled its lease for 325,000 square feet of space in an unbuilt skyscraper near Salesforce Tower.
San Francisco has a history of creating and recreating itself, from an instant city during the Gold Rush, to rising from the ashes of the 1906 quake, to an eventual recovery after the dark days of the 1970s and the assassinations of Supervisor Harvey Milk and Mayor George Moscone. The city that knows how will always evolve and change, but hopefully will never lose its magic.
