San Francisco’s slow recovery from Covid is a struggle for small businesses

An Airbnb-funded billboard shows opposition to Proposition F in downtown San Francisco, California.

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Marshall Luck’s chiropractic and massage practice in downtown San Francisco survived the Covid-19 pandemic thanks to government stimulus funds and heavy debt. But well over two years after lockdowns swept through the city, his business is back to just 70% of pre-pandemic levels.

Like its many small-business neighbors — those who managed to stay afloat — Luck was waiting for San Francisco to bounce back. It relies on techs from massive employers like Google and Salesforce, which is a challenge as these companies are flexible with back-to-office requests.

As major cities across the country struggle to fully recover from the pandemic, San Francisco is on another level as tech companies vacate leases and residents rush for more affordable locations. San Francisco mayor’s office, London Breed, estimates that a third of San Francisco’s workforce is now remote and out of town. Last year, that resulted in a whopping $400 million hit to tax revenue, according to the Comptroller’s Office.

The city center is finally showing some life. There is more foot traffic, fewer stores are closed, and some restaurants and cafes that have closed have been replaced by new tenants. But large swathes of once-thriving commerce remain dormant, and traders like Luck are in a fog of uncertainty, hoping that workers will eventually return.

“Most of our patients are big business, and as they come back, that will help us stay stable,” Luck told CNBC in an interview. “That’s what we’re clinging to – this recovery.”

The deepening struggle is the reality that Covid is not going away. With the rise of the omicron BA.4 and BA.5 subvariants, the United States is currently reporting an average of 126,000 cases per day this week, more than double the number at the end of April.

San Francisco Mayor London Breed speaks during a press conference regarding the next steps she will take to replace three school board members who were successfully recalled to City Hall on Wednesday, February 16 2022 in San Francisco, California.

Gabrielle Lurie | San Francisco Chronicle | Hearst Diaries via Getty Images

Bay Area commuters who take public transportation still prefer to stay home. Average daily ridership on Bay Area Rapid Transit has fallen from more than 400,000 in 2019 to less than 80,000 last year. By May, the number had reached nearly 136,000 per weekday, according to the BART website.

“We still wear masks in our office, so it’s still a very present thing in our psyche,” Luck said.

Transport data reflects the image of real estate. The office vacancy rate in San Francisco rose to 24.2% in the second quarter from 23.8% in the prior period, according to research by CBRE. Other major cities are at historically high levels, but still below San Francisco.

Manhattan hit an all-time high in the quarter of 15.2%. Downtown Atlanta is at 22.8%, Chicago at 21.2%, Los Angeles at 21.8% and Seattle at 20.3%, CBRE said.

“We’re slower than New York, we’re slower than Chicago, and that has to be tied to our heavy reliance on technology,” said Robert Sammons, regional director of the Cushman and Wakefield research team in the North. -West.

Mayor Breed told CNBC in a recent interview that “most employees want some level of working from home when they return to the office and many employers are offering that as an option.”

Salesforce, San Francisco’s largest employer, said last week it was downsizing its offices in the city again and now lists 40% of a 43-story building across from the main Salesforce tower. Coinbase closed its San Francisco office last year and Lyft has pushed back its return to power until 2023 at the earliest. Most businesses that have reopened have done so with voluntary participation.

Even at Google, one of the most vocal tech companies when it comes to bringing employees back to the office, has backed down. Workers pushed back on their demands, citing the record profit the company generated last year. Management said it approved 85% of requests for relocation or permanent remote work.

“I failed to reach an agreement”

Tech companies with long-term leases are feeling the pain as commercial real estate properties in San Francisco have, on average, fallen between 30% and 40% below pre-pandemic prices, market experts said.

Global logistics company Flexport, which has a centrally located Market Street office that once housed 500 employees, has been unable to find a tenant to lease the space for more than two years.

“Our office has been listed via CBRE for subletting throughout the pandemic, but due to increased inventory and fierce competition in the sublease market, we have not been able to able to reach an agreement,” said Bill Hansen, global head of Flexport. estate, said in an interview.

Flexport founder and outgoing CEO Ryan Petersen previously told CNBC the company couldn’t find anyone to fill the job. He attached a sad face emoji to his post and said: ‘The space is awesome – we just signed up at high rates and the market was super soft thanks to Covid.’

In downtown Rincon Center, where Twilio is located, the food court has been almost entirely removed except for a few long-time tenants. Across the street at One Market Plaza, Mediterranean restaurant Cafe Elena is the only vendor open. The lights remain off in the other five, as they have been since March 2020. One Market is home to Autodesk, several floors of Google’s offices, and CNBC’s San Francisco studio.

“Everyone loses, it’s just a matter of measurement,” said Colin Yasukochi, who directs CBRE’s Tech Insights Center.

The Salesforce Tower, left, and the Salesforce West office building in San Francisco, California, U.S., Tuesday, Feb. 23, 2021.

David Paul Morris | Bloomberg | Getty Images

There is another side to the image of real estate in San Francisco. High-end spaces are experiencing record prices.

Last year, Salesforce listed space in its East Tower, which both Yelp and Sephora have sublet to the company. Terms were not disclosed, but property experts say they were expensive deals. In May, the Sobrato organization paid $71 million for a building in San Francisco’s South of Market neighborhood, setting a record at more than $1,700 per square foot.

Sammons of Cushman and Wakefield said employers know they’re going to have to offer more incentives for workers to come back and “this can’t just be a snack bar anymore.” They are trading now to prepare for that kind of future.

“We’ve seen some really big deals and big tech companies taking advantage of the market and realizing that they’re more comfortable going back to the office part-time and will need it later,” Sammons said. . “These are the kinds of companies that have funds ready to do this kind of stuff.”

Wait and hope for healing

Wells Fargo analysts and others expect the downtown real estate market to recover significantly in 2024 and 2025. But there’s no guarantee that San Francisco and surrounding cities in the East Bay and Silicon Valley will rebound completely.

Housing prices are still near the highest in the country and now interest rates are rising, making mortgages over $1 million even more expensive.

“Without a solution to the area’s affordable housing crisis, local businesses will struggle to convince graduates to stay in the area,” Wells Fargo analysts wrote in a report this month titled ” What’s next for San Francisco’s economy?”

“Bringing back gold rush fever to the tech sector and convincing workers from other regions to move to the Bay Area will be even more difficult,” the analysts wrote. However, “while many companies have expanded or even moved outside the region, the Bay Area still has the most comprehensive tech ecosystem in the world,” they said.

Mayor Breed, who recently proposed a $14 billion annual budget for the 2022-23 fiscal year, recognizes that the world of work has changed. It is counting on the cultural and touristic attractiveness of San Francisco to help bring about a revival.

“Our concerts, our activities, our conventions, a lot of things that people would want to visit a big city for are what we need to focus on as well,” she told CNBC. “Working in the office will only be an adjustment to change.”

The market faces additional potential headwinds as real estate contracts expire over the next year. Landlords are likely to be forced to offer better terms to tenants, who are considering moving away or at least downsizing, experts said.

Some small businesses have entered into revenue-sharing agreements with owners to ease initial costs and spread risk. Some are discussing sharing spaces with other tenants in a way that “has never been done before,” Sammons said, calling it “a whole new world in some ways.”

At Luck’s clinic, things go badly. He had to cut staff and rely on loans he said he would “probably pay back for the rest of my life”.

But Luck said he has seen down cycles before and expects history to repeat itself.

“I’ve been through the crash of internet companies and the housing bubble,” he said. “Recessions happen and they also recover, eventually. Hopefully in four to five years there might be a more diverse business population.

– CNBC’s Yasmin Khorram contributed to this report

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