San Francisco Chronicle - (Sunday)
DOWNTOWN S.F. ON THE BRINK: IT’S WORSE THAN IT LOOKS
As with many cities, a stroll through downtown San Francisco on any business day reveals signs of renewed life.
Against the backdrop of shuttered, graffitied storefronts and other detritus left in COVID-19's wake, professionals can once again be seen en route to their now sparsely populated offices or the few cafes and restaurants that survived their absence, now eager for their precious patronage. Some new businesses have opened, and tourism has ticked up.
Don't be fooled. Downtown, the city's primary economic driver, is teetering on the edge, facing challenges greater than previously known, new data shows. The wounds suffered by the economic core are deep, and city officials have yet to come up with a plan to make the fundamental changes that some economists and business leaders argue could make the area thrive again.
“A general economic decline is what we're trying to avoid,” said Wade Rose, president of Advance SF, a business group that advocates on behalf of several major employers in San Francisco. The group is working with the city on short-term ideas to bring more people back downtown, but Rose agrees that the problem needs a rethink in the long run.
Before the pandemic, office work was responsible for a whopping 72% of the city's gross domestic product, according to the Controller's Office — work that was heavily concentrated in the Financial District, the Market Street corridor, the Embarcadero and Mission Bay. A precise definition for downtown doesn't exist, and various city agencies use different boundaries, with some regarding it as the northeast portion of the city.
It is easy for San Franciscans who don't work downtown to ignore it. The city is made up of neighborhoods that serve many of the needs of residents living in them. Relative to many other American cities, few people live in what is loosely considered downtown. The result is that many see the area as largely for office workers, tourists, conventioneers and a handful of destination restaurants.
When all office work shut down, BART ridership dropped catastrophically, and it is not projected to recover fully until
the 2029-30 fiscal year at the earliest. The transit system's looming deficit has given rise to whispers of a new regional tax to fill the gap. Without commuters spending money near their San Francisco offices each day, other downtown businesses closed, destroying the incomes of many who could ill afford it.
If swaths of shops, restaurants and cafes downtown stay shuttered, it could cause lasting harm to tourism, said Joe D'Alessandro, president and CEO of San Francisco Travel, the city's primary tourism and convention trade association.
“We don't have a Disney park here,” D'Alessandro said, so San Francisco relies heavily on its hospitality industry to attract families and business groups. “Most of the hospitality industry is made up of small businesses,” he said.
A slow recovery
It has been a year since vacant office-space rates soared to their highest levels since the 2008 Great Recession, as some business activity has picked up. But while other major cities face large numbers of workers not going back into offices, San Francisco's numbers are among the highest nationwide.
The San Francisco metropolitan area has consistently lagged behind nearly all other major urban centers in worker returns, according to office-occupancy trend data from Kastle Systems, a security company that monitors access-card swipes at client buildings.
In San Francisco's downtown area specifically, office attendance has been even lower than reported. At The Chronicle's request, Kastle provided swipe data for the eight ZIP codes that make up the city's office-heavy northeast. The data shows that the rate of worker return, relative to pre-pandemic levels, has not broken 30% and was 26.4% the week of May 18, the most recent period the company provided.
Other news reports have cited higher figures — for example, 34.6% for the same week in May — because they drew from Kastle data that included swipes from Oakland and Hayward, the two other large cities in the San Francisco metro area. And this is despite efforts by Mayor London Breed and some business leaders to urge workers to come back to their offices. A recent COVID-19 variant surge isn't helping.
If those suites and retail spaces remain empty in the long run, “the buildings will be devalued,” Rose said, “which ultimately means that tax revenues will decline dramatically” and endanger city coffers. Another potential challenge, Rose said, is that many tech firms might see San Francisco, with its high real estate prices and taxes, as no longer worth it, given how many employees are working remotely.
“If the number of companies diminish and the number of people working in the tech industry diminishes, the network effect diminishes, and the digital engine starts cooling down,” Rose said. “And that is not a good thing.”
Even if tourism returns to pre-pandemic levels by 2024, as projected, the levels of remote versus in-office work will be the major factor in when and how the city, and downtown in particular, recovers. And the outlook is not encouraging.
“San Francisco is not likely to ever get office workers returning more than 50% of the time,” according to Nicholas Bloom, a Stanford University economics professor who studies remote work trends. In other words, an average of 2.5 days per workweek. Attempts to surpass that threshold would be like “trying to push water uphill,” he said.
Bloom is part of a team that has conducted monthly nationwide surveys since early in the pandemic, each with between 2,500 and 5,000 participants. Respondents reported their employers' latest plans for post-pandemic work policies — the number of days per week that staff would probably work from home.
In August 2020, the first instance of the survey, employers expected staff to work an average of 1.6 days per week in the office once society normalized. The figure has steadily risen since then and was 2.3 days in April, the most recent period measured. It appears to be stabilizing.
“It will likely flatten out at 2.3, 2.4, 2.5,” Bloom said. “I've talked to hundreds of employers, and that's the same message we're getting. So that triangulates very well.”
But remember: That's just the national average.
“San Francisco would just look like a more extreme version of this,” Bloom said, because it surpasses many other cities in key traits that foster remote work. With its highly educated workforce and prevalent technology and finance industries, many of its employees can work on a laptop from the comfort of their own couches.
Indeed, a separate, one-time survey that Bloom conducted from January to March of this year found San Franciscans wanted to work remotely 53% more often than they did before the pandemic, outpacing office workers in the other cities studied.
Those figures stand in sharp contrast with budget projections from the city's Controller's Office, which rest partly on the assumption that remote work will normalize at 33%, meaning workers would be in the office two-thirds of the time.
“There's not a precise calculation that led to our specific estimates,” said Carol Lu, citywide revenue manager for the office. “There is a lot of uncertainty about this projection.”
Her team based its estimate on the level of office attendance that some major employers like Google and Apple were requiring, as well as what smaller employers expected and what experts in the commercial office market were hearing.
Two days per week of telecommuting, or 40%, was the most common answer. The office lowered it to 33% “to account for employees who choose to come into the office more,” Lu said, as well as “financial and legal industries which seemed to expect more days in the office than the technology companies.”
But Lu acknowledged that “we don't know how well hybrid plans will work for companies. We don't know how telecommuting will evolve over time. We don't know what employees' expectations will look like a year from now.”
Bloom, on the other hand, is more certain.
“It's pretty clear what's coming,” he said. “The sooner I think we face that, and adjust, the better it will be.”
City revenues may suffer
Over time, multiple tax revenues for City Hall could be at risk: property taxes, from emptied buildings that drop in value; sales taxes, from businesses that are struggling or gone; and others. That could lead to a reduction of public services, Bloom said.
“My biggest fear is the city either has to slash spending on, say, police, or it aggressively puts up taxes on businesses to cover the shortfall and drives them out of the city,” he said.
In March, the Controller's Office said it expects a budget surplus of $74.7 million over the next two years, based in part on the city's projections of officeworker returns, federal financial aid and record-high returns on pension investments. But that estimate was revised downward to $15 million last month, in large part due to expected salary increases for publicsector union workers.
Remote work aside, vacant offices — space that is either not leased or leased by an absent tenant who is trying to sublease it to recoup rental costs — are of continuing concern. A record high 20.4 million square feet of San Francisco office space, or roughly 24% of the citywide total, was vacant at the end of the first quarter of this year, according to real estate brokerage firm CBRE.
Vacancies could increase as companies get better at coordinating their hybrid staff, efficiently staggering in-office days so that they can permanently reduce their total square footage, Bloom said.
Businesses hobbled
The impact on local businesses cannot be overstated. During the pandemic, absent office workers' earnings stopped flowing to cafes, retail outlets, restaurants and entertainment. Even once office work normalizes, the average worker will still spend an estimated $5,293 less per year in San Francisco, according to joint research by Bloom and economists at the Instituto Tecnológico Autónomo de México and the University of Chicago.
The fallout: Empty, abandoned office and commercial spaces mar the Financial District and surrounding areas. Many of the windows are bannered with signs for leasing opportunities, an odd appeal along these sparsely inhabited streets, where depressed consumer demand is obvious.
On one stretch of Kearny Street between Sutter and Pine,