Still some ‘doom,’ maybe no ‘loop’
S.F. recovery remains shaky, with deficit and office space glut
One year after San Francisco was introduced to the concept of a “doom loop,” in which fears of a remote work-fueled real estate “apocalypse” would trigger mass tax shortfalls, budget cuts and out-migration, the city has yet to spiral into the worst-case scenario, experts say.
But the recovery remains very shaky, with the city cutting spending as it grapples with a budget deficit that could reach a staggering $1.36 billion by 2027 — the equivalent of nearly 10% of this year’s total budget.
Much of the pain stems from an ongoing reckoning in commercial real estate, propelled by workers opting to stay home. Mortgage defaults on notable downtown properties, including the city’s biggest mall and biggest hotel, and fire sale prices for office towers, continue to be common. Tech layoffs have pummeled the San Francisco metro region, with 13,000 information sector employees cut between March 2023 and March 2024, though the city’s unemployment rate is relatively low at 3.7%. Tourism is still two or three years from a full rebound. BART and Muni, the critical transit backbones for a downtown recovery, are fighting for their fiscal lives.
“I think the story from a year ago hasn’t changed much. It was a slow recovery then, and the cyclical issues facing key sectors like tech and construction have weighed us down since then,” said Ted Egan, the city’s chief economist.
“I don’t expect that to last forever,” he said. “The region has kept up its share of venture capital and is a leader in artificial intelligence, and that bodes well for the future of tech here.”
One of the biggest contrasts compared with a year ago has been the surging AI sector. Spearheaded by OpenAI, which signed a massive Mission Bay lease last year and is on the hunt for potentially more space, development of the technology has burnished the city’s busi
“The world has changed, and it will be a different mix. This is a city that’s as resilient as any city out there.” Scott Beck, San Francisco Travel CEO
ness reputation and shifted some of the narrative away from downtown’s struggles.
The city also saw modest 0.1% annual population growth between July 2022 and July 2023, according to the latest state data, even as other Bay Area counties shrunk.
And downtown has been packed with people this month. Two dance-oriented block parties, First Thursdays in South of Market and Bhangra and Beats in the Financial District, each drew thousands to revel, eat and shop in the area, with over a dozen more events planned. The RSA cybersecurity conference also flooded Moscone Center with 40,000 attendees last week.
The argument for a revival is central to Mayor London Breed’s bid for reelection against a crowded field. But a drawn-out recovery period is still expected.
“Five years from now things should be back close to prepandemic trends, but we are looking at a recovery period of years, not months,” said Nicholas Bloom, a Stanford economics professor who studies remote work.
“I’m long-run positive on the city with the highly educated population nearby, connections to world-class universities, fantastic weather and Asia exposure. That all bodes well for long-run growth and expansion. Yes, San Francisco has taken a knock, so ‘doom’ is appropriate but not ‘loop.’ Things are down but the city will recover, and indeed San Francisco is the classic boom-and-bust city,” he said.
Although conventions and parties help downtown’s businesses on some days, San Francisco’s return to office rate remains anemic. It’s been stuck around 45% of 2019 levels for the past year, among the worst for major cities, according to security firm Kastle Systems, which measures security card swipes.
Placer.ai, which uses location data from mobile devices, similarly said San Francisco office visits were just over half of 2019 levels in April, the worst among major cities it tracked, although the company said the city had seen a strong yearover-year gain.
San Francisco’s biggest office landlord, BXP, formerly Boston Properties, said for peak office days like Tuesday and Thursday, “New York is basically back. … Boston is at about 75% on that measure, and the only place where it’s really lagging is in San Francisco, which is about 45% or 50% for those peak days,” according to CEO Owen Thomas on an earnings call this month. The company, which owns Salesforce Tower
“San Francisco has taken a knock, so ‘doom’ is appropriate but not ‘loop.’ Things are down but the city will recover, and indeed San Francisco is the classic boom-and-bust city.”
Nicholas Bloom, Stanford economics professor who studies remote work
and Embarcadero Center, said last year that commercial real estate was in a “recession,” even though the broader economy is not.
Remote work has unleashed a massive cutback in tech leasing since 2020, which has, in turn, devalued office buildings and threatened a major source of tax revenue. Salesforce, the city’s biggest private employer with around 10,000 local workers, said it cut its office space by 45% in 2023, from 1.6 million square feet to 900,000 square feet, in part by leasing it out to other tenants.
The city’s office vacancy rate was a record-high 36.6% at the end of March, according to real estate brokerage CBRE.
“S.F. is still the worst major office market in the country in terms of vacancies, and we are not at the bottom yet,” said Stijn Van Nieuwerburgh, the Columbia University professor who co-authored the 2022 “doom loop” paper that was cited in the Chronicle story last March that first applied the term to the city.
He noted that Google said just last week that it is exiting 300,000 square feet at One Market Plaza. It’s the tech giant’s first significant real estate cut in San Francisco ever and coincides with numerous rounds of layoffs.
“Tax receipt declines, which are at the core of the urban doom loop, are also likely to get worse in the near future. To use a real estate analogy, S.F. has good ‘bones’ but needs a major renovation in terms of policies that will stimulate investment in conversions and businessoriented reform,” Van Nieuwerburgh said.
Business leaders and elected officials are trying, with a major tax overhaul aimed for the November ballot that is expected to cut taxes in the near term, with support from Breed and Board of Supervisors President Aaron Peskin, who is also running for mayor. State efforts to streamline downtown project approvals and office-to-housing conversions are also underway.
But sky-high construction costs and weaker demand have frozen almost all development projects in San Francisco. Instead of construction cranes, downtown has been marked by shuttered storefronts. Meanwhile, BART, the city’s and region’s primary rail transit service, is staring down a $385 million deficit by fiscal year 2027, with its best hope for solvency coming in the form of a ballot measure not guaranteed to pass. Muni is in a similar situation, with the San Francisco transit service facing a $240 million gap by 2026.
The challenges are particularly acute around the crucial Union Square shopping district. There’s the former Westfield San Francisco Centre, the city’s biggest mall, which is under new management after its namesake previous owner stopped paying its mortgage last year. A couple of blocks away, two of the city’s biggest hotels, Parc 55 and Hilton Union Square, are also under receivership and seeking a sale after owner Park Hotels & Resorts gave up on the properties’ nearly 3,000 hotel rooms. Nearby, Macy’s is preparing to close its decades-old flagship store.
Part of the area’s pain comes not just from the absence of office workers, but also a significant shortfall in tourism.
In 2023, visitor spending was around 8% below 2019’s record year, according to San Francisco Travel, the city’s tourism bureau. But hotel revenue, which depends on large business conventions and corporate travel, was down about a third from 2019 revenue in the spring.
“The impact of remote work hits our market harder than most markets nationally,” with tech companies cutting back on corporate travel, said Scott Beck, the new CEO of San Francisco Travel.
Moscone Center bookings are also down this year, with events accounting for 430,000 room nights, compared with over 618,000 last year and 550,500 next year. Beck attributed the drop to the inability to sell the convention center during 2020-2021 COVID shutdowns, which affected bookings this year.
But tourism is expected to continue improving, and Beck noted spending from Chinese visitors is likely to surpass 2019 levels this year, even though the number of visitors from China will be around 30% below that 2019 level. Affluent Chinese visitors and those passionate about travel are still coming to San Francisco, Beck said, despite China’s economic slump.
Overall tourism spending won’t recover until late 2026 or 2027, compared with 2019, Beck said.
“The world has changed, and it will be a different mix,” said Beck, who remains optimistic. He said organizers of the recent RSA Conference, as well as other events, have noticed that downtown is becoming more vibrant and attractive.
“This is a city that’s as resilient as any city out there,” he said.