I first wrote about the exodus of workers from San Francisco back in January of 2021. That trend was driven partly by the high cost of living in the Bay Area, partly by the rise of crime and homelessness and partly by the fact that the pandemic made working from home the new normal for a lot of white collar workers.

It’s not just individual workers who are leaving the city, entire companies have decided to downsize their footprint downtown. Again, there are multiple reasons why this is happening now but the bottom line is that San Francisco office space isn’t as appealing as it used to be. According to the San Francisco Standard, that means the city itself could be headed for a commercial real estate crash.

The root of this—of course—is the pandemic and the way that it has completely transformed work patterns in the city, hollowing out a downtown core that once accounted for most of San Francisco’s GDP, 70% of its sales tax revenue and 40% of the city’s jobs. And there’s an uneasy feeling among a coalition of business groups that city leaders are sleepwalking into an economic calamity with far-reaching consequences.

Signal lights of the city’s tenuous fiscal future are starting to flash. Major tech employers like Yelp and Airbnb have fled or gone fully remote, leading to mass office vacancies. A swath of commercial landlords are seeking massive reductions in their assessed property values—and associated tax bills. And a recent report from the Urban Displacement Project ranked the city’s downtown recovery as dead last among more than 60 cities across North America.

In February I wrote about the concept of “peak office.” The idea is simply that with white collar workers pushing to work from home on a more permanent basis, some companies are now downsizing office space to match the demand. But because commercial office space rentals usually involve multi-year lease agreements, that change doesn’t happen overnight. I given company may be locked in for a year or several before they are in a position to negotiate for less space. And that matters because it suggests the impact of peak office hasn’t really been felt yet.

…a slew of office leases signed at the height of the city’s economic boom are poised to expire over the next few years, further inflating vacancies and diminishing what the office towers that draw the city’s skyline are worth. There’s currently more than 25 million square feet of commercial space available for lease or sublease in the city, the equivalent of about 35 Transamerica Pyramids sitting empty…

Citing data from real estate firm JLL, SF’s chief economist Ted Egan tagged future vacancies, in a worst case scenario, as high as 53% in the Jackson Square area and 43% in the mid-Market area in 2024 as the clock runs out on office leases.

In short, things are bad now but there’s every reason to think they are going to get a lot worse in the near term. As those buildings empty, the value of real estate city wide is being driven down and the ability of owners to pay there property taxes drops.

In California there’s another wrinkle in this story called Prop 13. Prop 13 limits the amount property taxes can increase in a given year to 2%. For older properties this means they are probably already paying rates that are well below the actual market because property values in California have been growing at way above 2% a year. So when values drop, as they are now, long-time owners aren’t really over-extended, i.e. they’ve been underpaying thanks to Prop 13 and now the actual values have dropped closer to what they pay. But the situation is different for new construction. Their values may be based on what things are currently worth so when the market drops they are now overpaying. In any case, the city can probably expect a lot less income over time. Even their current estimates may be too optimistic.

The city’s most recent budget forecasts estimate that office workers will telecommute 33% of the time when an in-person return to the office stabilizes.​​​​ That number seems strikingly optimistic compared to data from key card company Kastle Systems indicating that SF’s downtown offices are only about 30% full…

The city’s budget office expects property tax revenues to continue to grow. But Howard Chernick, an economics professor at Hunter College and co-author of the report that forecast an up to 43% decline in SF’s property values, paints a much worse picture: His team sees a decline of up to 15% in property tax collections amounting to a roughly 4% drop in total revenues.

That works out to something like $240 million per year, money that the city won’t have to spend not to mention the expected growth in revenues that the city has built into its assumptions. I don’t want to get my hopes up but the deep blue city that recalled it’s woke school board and it’s far-left district attorney may now be starting to think seriously about the need to cut taxes. If you’d asked me a decade ago if that would ever happen I’d have have said no chance but the world has changed, partly because of the technology created in Silicon Valley and now San Francisco is going to have to change with it.