The Commercial Real Estate Crash Coming To San Francisco

Since the early months of the pandemic, many residents have left San Francisco, California, and businesses have moved the bulk of their presence out of the downtown area, drastically impacting San Francisco’s commercial real estate.

While many cities saw people move out during the pandemic, the timing for San Francisco is important, as right now, there is over 25 million square feet of commercial real estate currently vacant.

Even with business returning to normal, the city has seen a lot of empty office space recently, but many office leases that were signed during the peak of its economic growth are going to expire over the coming few years. This is going to severely impact not only how many offices are empty — but what those offices are worth. Some landlords are looking for their property values to be lowered and some want to have their taxes reduced since their properties have decreased so much in value. Drastic reductions in commercial property values will also have downstream effects on the tax base.

San Francisco gets most of its revenue from property taxes, so this could harm the funds available to fund programs and pay city workers’ salaries. Proposition 13, a California constitutional amendment, put limits on property taxes, so that might help avoid a sudden crash in the property taxes the state gets.

A November report from the Institute of Taxation and Economic Policy found that San Francisco could experience a short-term drop in commercial real estate values of up to 43%, which was the steepest forecast in the study.

Working trend shifts are contributing to the situation. Many companies have gone remote, and San Francisco disproportionately houses tech companies, which were most likely to go remote, and so they stopped needing as much office space. Yelp and Airbnb, for example, have gone almost entirely remote.

For years, San Francisco has been at times the most expensive place to live in the country. San Francisco has notoriously restrictive building codes that make it extraordinarily difficult to obtain permits for residential construction projects, so it’s not likely that these reductions in property values will translate to lower rents any time soon.

The city appears to be focusing on revitalizing the downtown. Community organizations and business groups are pressing the city to do more to bring people back to the downtown area with things like art spaces and cultural events, but that may prove to be a difficult task. A recent Urban Displacement Project report ranks the recovery of San Francisco’s downtown area in last place of more than 60 cities.