Property tax losses add up downtown
Hit could be as much as $200 million annually due to high vacancy rates
The hollowed-out offices of downtown San Francisco’s skyscrapers might cost the city as much as almost $200 million in annual lost property taxes in the coming years, according to a new estimate.
A model released by the Controller’s Office Wednesday projects three different scenarios for how badly the city’s property tax revenue could be hammered by the high vacancy rates plaguing the formerly bustling towers of the Financial District and elsewhere in the city.
Under the most optimistic scenario, the city estimates that annual property tax losses from empty offices could reach about $100 million in 2028. A more measured scenario puts that figure at more than $125 million. The most pessimistic scenario puts it at nearly $200 million. That data is based on vacancy projections from a major commercial office broker.
The Controller’s Office developed the model as part of an effort by city leaders to figure out the extent to which downtown office vacancies might hurt municipal finances. San Francisco’s commercial core has had one of the most sluggish pandemic recoveries in the country, as many of the office workers who once commuted regularly continue to do their jobs mostly from home.
The model only looks at property taxes from office buildings — it does not include estimates of sales taxes and other business tax revenues that feed into the city’s $14 billion budget. In another potentially telling sign, the city recently revealed that funds from a business tax intended to reduce homelessness came in tens of millions of dollars less than budgeted for last fiscal year.
The Board of Supervisors’ budget and finance committee discussed the model Wednesday at the urging of Supervisors Catherine Stefani and Ahsha Safaí. Stefani had asked city officials to analyze how the reduced demand for commercial space would impact local tax revenue.
“We are facing a significant iceberg coming toward us,” Safaí said at the committee hearing.
Stefani had a more grim outlook.
“I actually think we might have hit that iceberg,” she said. “The situation is dire.”
Chief Economist Ted Egan told supervisors that the model’s worst-case projection — $200 million in lost property taxes — would translate into an estimated 35% reduction in all property taxes paid by offices.
Residents and businesses are looking to Mayor London Breed and other city officials to create a plan to revive downtown. Breed tried to encourage more office workers to return downtown, but she has now admitted that many of them aren’t coming back. She now wants the city to look at attracting other kinds of businesses, including biotech companies.
San Francisco could also try to convert some of its empty office towers into housing, though it would be a costly and difficult endeavor.
Egan told supervisors that he did not expect office-to-residential conversions to help offset lost property tax revenue very much because, “I don’t expect it to happen.”
He said developers have little incentive to embark on such conversions given high construction costs, inflation and the city’s sluggish housing market. Egan said San Francisco would more likely see its offices become used in more flexible ways and possibly attract businesses that could not previously afford to locate downtown.
“I can see a lot of things happening, but a wholesale conversion from office to residential, I just don’t think is in the cards,” Egan said.
With remote work being embraced by some of the city’s major private employers, some firms have sharply reduced their local office footprints or uprooted entirely. What’s more, layoffs at Twitter, Meta, Asana and other tech companies over the past month or so have further dimmed the city’s economic picture.
The trend of remote work could have dire consequences for the city budget. San Francisco relies on the office sector for 18% of its property taxes, according to the Controller’s Office, and vacancy rates aren’t expected to improve much soon. In fact, the situation could get worse before it gets better: The city’s 24.1% office vacancy rate in the third quarter this year might grow to 30.8% by the third quarter next year before improving, under the worst-case scenario identified by the controller.
And even if offices begin to fill up again, the city expects that vacancies could remain between 19.5% and 25.3% in 2026 — a range that would be “as high, or higher than any previous peak in office vacancy dating back to the 1990s,” an October report from Egan said. Since the beginning of the pandemic, San Francisco has seen the largest increase in vacancies among major U.S. office markets, according to Egan.
City officials have taken note of other troubling signs for downtown, including two forsale office buildings that were pulled off the market after bids came in far lower than their owners’ worst expectations. Some downtown building owners are also beginning to ask the city for reassessments in the value of their properties, which determines how much property tax they pay.
Owners are arguing the value of their buildings has gone down because vacancies are higher. Those reassessments will likely eventually strain city finances.
Additionally, Supervisor Rafael Mandelman has asked the controller and city treasurer to complete an analysis by April 1 of how business tax revenue has been affected by the sharply reduced ranks of San Francisco office workers.