Commercial real estate landlords are abandoning the once coveted properties in San Francisco.
The lack of hope among property owners is due to office vacancies, but crime is also a factor.
Data provider Trepp’s Manus Clancy says the downturn in the city center is likely to get worse rather than better.
The decline of downtown San Francisco is happening fast.
Landlords big and small are waving the white flag in the face of mounting pressure on the City in part due to downsizing at some of the largest employers and the inertia of working from home.
In May, visitor numbers to San Francisco offices fell nearly 60 percent compared to 2019 — the largest shortfall among major U.S. cities tracked by Placer.ai, and it shows. The city’s 18 million square feet of vacant office space is so large it could house 92,000 people, according to the San Francisco breaking latest news.
Since April, the office tower at 350 California Street has been priced an alarming 75 percent below its pre-estimate Pandemic sold. The owner of the flagship Hilton San Francisco Union Square and nearby Parc 55 turned over the keys to his creditors instead of trying to make payments on a $725 million loan. A few days later, Unibail-Rodamco-Westfield and co-owner Brookfield returned San Francisco City Center to their lenders after retailers had left the mall doing well half occupied war.
The surrender of some of the most demanding real estate company after the shedding of tech jobs and the rise of remote work is a bleak omen for downtown San Francisco. The real estate defaults have been long anticipated, but not all at once: many investors thought they would roll in as owners took advantage of the ability to extend the terms of their loans, escalating their losses could drift.
Even more problematic, the loss of workers, the business travelers they attracted and the stores they shopped in is creating a vicious circle that won’t be broken anytime soon, said Manus Clancy, a senior managing director at the data provider Trepp, who tracks corporate and commercial real estate debt.
“San Francisco is in a chasm that’s getting bigger by the day,” Clancy, who lives in New York, told Business Insider. “Shop closures, crime and other quality of life issues are fueling an epidemic of negative publicity that is hurting tourists and… keep workers away. It’s likely to get worse before it gets better.”
A wave of job cuts at big tech companies like Snap, Meta and Salesforce helped the city’s office vacancy rate jump to nearly 30 percent last quarter, up from less than 5 percent three years earlier, according to CBRE. The workers who are still employed have resisted the long commutes that are common in the peninsular city, data from Placer.ai shows.
Last quarter, just 36 percent of workers who worked in San Francisco offices commuted more than five miles, the lowest percentage of commuters who returned to their jobs in Boston, Chicago, Houston and New York, like those show data. However, among workers who live closer to their San Francisco office, the proportion of daily commuters is relatively high.
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The good side of vacancies: space for start-ups
Some of these workers are likely part of the explosion of generative AI startups in San Francisco, of which about 22 percent are based in the region. The founders of Krea, a company that develops models for high-quality imaging and asset management services, packed their bags in Miami last year and moved to San Francisco’s Hayes Valley, which is not far from Union Square and has become a paradise for Pursue how yours develops.
However, because startups are inherently small, they cannot make up for the declining population. According to the Census Bureau, urban exodus reduced the population by more than 65,000 between April 2020 and July 2022.
As the demand for housing has decreased, the median home prices inflated during the pandemic in the year to April down nearly 18 percent, almost three times the decline in Manhattan. As for rentals, landlord Equity Residential has “limited pricing power” in the downtown market and is making concessions to attract tenants, the company’s chief operating officer said at an earnings conference in April.
Jeff Burg, a real estate investor who has bought and rented small townhouses since 2002, said he gave up the city because it make too many rules for him.
“I sold all of my San Francisco rentals in the last year and moved away with my family forever,” Burg told Business Insider via LinkedIn. 23 years later we move on with our lives. Whatever is going on in San Francisco, we no longer have any interest in being a part of it.”
The fear of crime taints the city
Crime, or the fear of it, also often creeps into conversations about San Francisco.
Thomas Baltimore, the CEO of Park Hotels & Resorts, which gave up the Union Square hotels last week, said in a statement that “road conditions” are adding to the real estate strain, along with record-breaking office vacancy rates. In some parts of the city – including the Tenderloin Districtwhich borders Union Square and the Westfield Mall shopping center — more murders were committed this year, although the Mordrate in San Francisco according to ABC 7 compared to others big cities is lowest.
Crime doesn’t seem to be stopping tourists, whose numbers rose 29 percent to 21.9 million last year and are likely to reach 23.9 million this year, the sources said San Francisco Travel Association.
Still, the signs of crime in San Francisco are ever-present. The number of assaults and robberies has increased while the number of rapes has decreased ABC 7 recently noted. And social media posts, including one from Elon Musk, following the stabbing death of tech executive Bob Lee in April denounced “appalling” violent crimesincrease the fear.
In a Whole Foods market in the Mid-Market District – also near Union Square – there was one such accumulation of offensesthat the managers simply closed the market opened last year in April. According to the New York Times, 568 911 calls were received from the store over a 13-month period, many related to violence and drug use.
A real estate agent, who asked not to be named, told Business Insider that on a recent family trip to town, his tour guide said the tenderloin was so run down that cops were getting paid more to patrol. People affected by homelessness have long congregated in the Tenderloin neighborhood, while the Bay Area’s homeless population has risen 35 percent to 38,000 since 2019, according to McKinsey & Co. found.
Frank Scavone, a veteran commercial real estate investor who is now a managing partner of Third Point Real Estate Strategies, was musing as to why the workers weren’t coming back, but he was more certain of the result — falling building values.
“I wonder what’s causing the vacancies in the San Francisco offices,” Scavone told Insider. “No one feels safe in the Downtown from San Francisco? Is it because the downstairs merchants and amenities associated with downtown are gone because of crime?” He continued, “Is it because downtown San Francisco is separated from the suburbs in Marin County or the East Bay is hard to get to?”
“Taken together, these issues form the basis for workers saying, ‘We don’t want to be there because we don’t feel safe, or because it’s no longer a comfortable place to work, or because we feel we’re entitled to somewhere else have the workweek organized,’” he said.
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