San Francisco is in trouble, battered by remote work and the homeless crisis
Deserted offices, empty streets and rampant crime could put the city in a "doom loop."
Last week’s disclosure by a major hotel group that it was abandoning two flagship properties in downtown San Francisco was the latest blow to a city that has been battered like no other by the coronavirus pandemic.
Another blow came days later, when the mall operator Westfield said it was fleeing its huge downtown property.
Some residents worry that San Francisco is entering a “doom loop” in which commercial real estate will collapse, municipal tax revenues will vanish and city services will be drastically cut back.
Other cities have faced similar struggles, but none have been quite like San Francisco’s.
Remote work leads to empty offices
In the years before the pandemic, the technology sector clustered in the Santa Clara (i.e., Silicon) Valley began to move into the city itself. Neighborhoods filled up with moneyed young techies. Salesforce built a gleaming new skyscraper in the South of Market neighborhood, while Twitter moved into an Art Deco fortress on Market Street, the city’s main thoroughfare.
Then came COVID-19. It should not be surprising that the city that gave birth to the co-working platform Slack was quick to embrace remote work.
Given the option to leave San Francisco, many workers did just that. In recent years, the city had become among the least affordable in the United States: an average one-bedroom there cost $3,000 a month to rent. In the first year of the pandemic, San Francisco lost 6.3% of its residents, the largest drop of any American city.
Civic leaders including Mayor London Breed and Marc Benioff, founder of Salesforce, have pushed for a return to office work, but those efforts have produced lackluster results — and mounting anxiety.
“It's not employers' responsibility to ‘fix’ San Francisco,” Connie Loizos of TechCrunch wrote in 2022. “At the same time, there might not be much left to come back to if they wait too long.”
Read more from our partners: Why remote work is becoming a blue-state privilege
'Melting down fast'
“Commercial real estate is melting down fast,” Elon Musk of Tesla and Twitter recently warned. He wasn't exaggerating: Non-residential landlords across the country owe a staggering $1.5 trillion by the end of 2025.
Office landlords are struggling to find new tenants, since few companies are actively looking for space. Their properties are losing value quickly, but those landlords still have to pay back loans they took out before the pandemic.
Failure to repay those loans could trigger a banking crisis not unlike the one that devastated the housing market in 2007 and 2008.
The situation is especially dire in San Francisco, where 18 million square feet — one-third of all the city’s office space — remains vacant. While some cities have tried office-to-apartment conversions, the process for doing so is complex and not nearly the cure-all some want it to be.
There are downstream effects, too. Small businesses — lunch counters, florists, newsstands — close. Janitors and other service workers have to find new work.
The decision by Park Hotels & Resorts to give up on its Parc 55 and Hilton hotels was a painful vote of no-confidence in the city’s future. "Now more than ever, we believe San Francisco's path to recovery remains clouded and elongated by major challenges," the company’s chief executive said.
The speed with which Westfield followed suit strongly suggests the feeling is widely shared.
Read more from Yahoo Finance: The commercial real estate market is wobbling, and 2 of the largest players are feeling the pain of higher rates and tighter credit
The doom loop
Property taxes help stock municipal coffers. An empty office tower loses value, which means there are fewer taxes to collect. And value is plummeting. In San Francisco, a tower at 350 California St. that had been valued at $300 million before the pandemic is now worth an estimated $60 million.
According to an estimate by the Institute on Taxation and Economic Policy, San Francisco could lose as much as 9% of its revenue because of the devastation in its commercial real estate market. The city’s budget deficit is already $780 million, leaving City Hall with little room to operate.
“It’s not a good story, it’s not a pleasant story, but it’s the reality we have to live with,” city Supervisor Aaron Peskin recently told the local outlet KGO. Peskin warned of “profound financial impacts to San Francisco government’s tax base.”
The reluctance of tourists and conventions to return adds another source of fiscal pain, which shows no signs of abating.
Watch more from our partners: Businesses bailing out of San Francisco, experts explain what needs to change
A crisis on San Francisco’s streets
Crime, drug use and homeless encampments were all challenges before the coronavirus hit San Francisco.
The pandemic turned them into a crisis.
Breed, the mayor, has vowed to restore order. But the easy availability of fentanyl, lack of mental health services and a shortage of police officers have frustrated her plans. Police recently seized enough fentanyl in the city to kill 2.1 million people, almost three times its current population of around 800,000. And Breed can no longer blame Chesa Boudin, the widely disliked district attorney, since voters ousted the divisive progressive in June a year ago in a recall vote.
“San Francisco leaders brush off the bad news and say the city will recover,” one San Francisco resident, Anastasia Edel, recently wrote in the Los Angeles Times. “Yet nobody seems to know what that looks like, or what is the path forward.”
Read more: Protest, thrown brick disrupt San Francisco mayor's hearing on drug crisis response
