Ah, San Francisco. The news just keeps getting worse every time they turn around.

As of April this year, downtown office vacancies had already reached an astonishing 30%.

The news and the numbers are grim for Downtown San Francisco’s office market—and no one can say with any certainty where the bottom is.

In the first quarter of the year, office vacancies were the highest ever recorded, according to real estate broker CBRE. The firm estimated a 29.5% vacancy rate last quarter, substantially higher than rates seen during the dot-com bust and Great Recession and a seven-fold increase from the start of 2020.

Real estate analysts are expecting vacancies to tick up further as leases—including a major glut of shorter-term subleases—expire in the coming years. More dominos could fall if building owners, faced with lower revenues, decide to hand over their properties back to lenders, many of whom are already-distressed regional banks.

Subleases, which had been the cheapest and easiest fix to keeping warm bodies in buildings and the lights on, slowed to a crawl. Where once a property might be on the market for up to six months before it was rented, as of this past spring that time was up to fourteen months and growing.

Downtown was becoming a ghost town and property values were following occupancy off a cliff. Some owners were at the point of walking away, while others either watch as their investment slides in value, or they unload it for far less than it was worth just 3 years ago.

…For commercial landlords, continuing vacancies could lead to a breaking point. With refinancing growing more difficult, there are signs that some landlords are deciding that owning real estate in San Francisco is no longer worth it.

A prime example was real estate firm Redco Development and its investment partner AEW Capital Management walking away from the historic 1 Montgomery St. building that they purchased for $84 million in 2019.

“I think we’ll see more of owners saying, ‘This doesn’t make sense anymore. I can’t pencil this. I’m going to do a deed in lieu of foreclosure and give the property back to the lender,” said Janna Luce, managing principal at Cresa.

…Gap Inc. sold its building at 1 Harrison St. to the Sobrato Organization for around $80 million in February, which real estate experts say was around a 40% haircut compared with what the building would have fetched before the pandemic.

…Another possible sale that could set new precedent is the Union Bank building at 350 California St. Sources say bids for that building have come in at around a quarter of its $250 million pre-pandemic value. In a sign of the current state of the market, those offers are currently being entertained.

Developers, investment firms, and landlords have been taking a bath.

Did City Hall feel a prescient chill run up their spine? They were warned in November they had a Titanic situation brewing thanks to remote working impacting vacancies.

San Francisco could see nearly a billion dollars stripped from its budget over the next six years because of the cascading impact of remote work on the city’s economy.

…“Today it is clear to me and many of us that full-time in person work that our economic core is counting on is not returning to the same level as it has without incentives or policy changes,” Safaí said. “We are facing a significant iceberg coming to us in the City and County of San Francisco.”

Property taxes are San Francisco’s biggest source of tax revenue, bringing in more than $2 billion to the city’s general fund in the last fiscal year. The office sector represents around 18% of property tax revenue, meaning long-term office vacancies come with significant stakes.

Obviously it’s a situation that is unsustainable – there are few businesses who have returned. Those who have have reduced staff, the streets are infested and dangerous – what makes downtown San Francisco an attractive investment or place to homeport your business right now?

Nothing to recommend the location springs to anyone’s mind.

Now building owners are finally asking, “Then why are we paying premium real estate taxes as if we were a bustling metropolis?”

UH-OH

The pipers who have paid for all the growth only to watch it flushed away want to discuss a refund.

…At Chase Center, property owners are attempting to cut the city’s assessed $1.48 billion value for the stadium by some 58% to $635 million.

The owner of the Transamerica Pyramid, New York developer Shvo, which purchased the building in 2020, is seeking a 53% reduction in its assessed value from $485.5 million to $227 million.

The Westin St. Francis Hotel owners are applying for a more than 90% decrease in its assessed value of $787 million all the way down to $76 million.

…All told, there were 2,873 property assessment appeals in San Francisco filed to the assessment appeals board in the fiscal year ending in July, reflecting more than $60 billion in total property values.

Other notable properties seeking major cuts to their property values include:

• Westfield San Francisco Centre, seeking a 60% reduction from $499.7 million to $199.9 million,

• Macy’s Union Square, seeking a 50% reduction from $354.3 million to $177.2 million,

• The Armory in the Mission District, seeking a 42% reduction from $87.3 million to $50 million.

That’s going to chew away at the $2B a year the city used to receive from its commercial real estate, and at a time when it is already facing a whopping two year estimated budget deficit of $744M.

…There are risks on the horizon. San Francisco property tax revenue is currently projected to fall between this year and next, and the city is expecting to refund around $167 million in property taxes over the next two years because of successful assessment appeals

Ouch. And then there are the developments which might have helped out the situation…but because of the situation, they’ve come to a screeching halt.

Nothing says “thriving” like a big $170M hole-in-the-ground for who knows how long.

Lendlease, the Australian developer behind the only major high-rise in San Francisco to break ground during the pandemic, is pausing construction on its Hayes Point development pending the signing of new tenants or a capital partner.

The planned $1.2 billion development, which broke ground last year at 30 Van Ness Ave., is slated to consist of 333 units of for-sale condos and around 300,000 square feet of office and retail space.

The decision is a blow for the company’s largest investment in North America and the only major high-rise in San Francisco to kick off construction during the pandemic.

The company won’t restart until they have commitments from either tenants or capital partners – they have neither right now. But the $170M spent so far is a far cry from a finished, massive – and empty – condo and retail tower.

When you look at all the taxes San Francisco soaks businesses for and the state of the city right this moment?

I’ll bet they think they got off cheap.