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

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.

Josh Edelson |: AFP |: Getty Images:

Marshall Luck’s chiropractic and massage practice in downtown San Francisco survived the Covid-19 pandemic thanks to government stimulus money and massive debt. But more than two years since the lockdowns spread across the city, its business has returned to only 70% of epidemic levels.

Like many of its small-business neighbors that managed to stay afloat, San Francisco’s fortunes were waiting to return. He relies on tech workers at massive employers like Google and Salesforce, which is a challenge because those companies are flexible with back-to-the-office requirements.

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

The center is finally showing some life. There is more traffic, fewer shops are boarded up, and some restaurants and cafes that have closed have been replaced by new tenants. But vast, once-vibrant swathes of commerce remain dormant, and traders like Bakht are left in a haze of uncertainty, left to hope that workers will eventually return.

“Most of our patient population is larger businesses, and when they come back, that will help us stay stable,” Luck said in an interview with CNBC. “That’s what we kind of depend on, that recovery.”

Compounding the struggle is the reality that Covid isn’t going away. With the increase in Omicron BA.4 and BA.5 subtypes, the U.S. is currently reporting an average of 126,000 cases per day as of this week, double what it was in late April.

San Francisco Mayor London Breed speaks during a press conference about the next steps he will take to replace three school board members who were successfully recalled Wednesday, Feb. 16, in San Francisco, California.

Gabriel Lurie |: San Francisco Chronicle |: Hearst Newspapers via Getty Images

Bay Area commuters who use public transportation are still choosing to stay home. Bay Area Rapid Transit’s average daily ridership fell from 400,000 in 2019 to less than 80,000 last year. As of May, that number rose to 136,000 a week, according to BART’s website.

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

Transportation data mirrors the real estate image. San Francisco’s office vacancy rate rose to 24.2% in the second quarter from 23.8% in the previous period, according to CBRE research. Other major cities are at historically high levels, but still below San Francisco.

Manhattan reached an all-time high of 15.2% in the quarter. Downtown Atlanta – 22.8%, Chicago – 21.2%, Los Angeles – 21.8%, and Seattle – 20.3%, reports CBRE.

“We’re slower than New York, we’re slower than Chicago, and that has to do with so much reliance on technology,” said Robert Sammons, regional director of Cushman and Wakefield’s Northwest research team.

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

Salesforce, San Francisco’s largest employer, said last week that it is again downsizing its office space in the city and is now listing 40% of the 43-story building across the street from the flagship Salesforce Tower. Coinbase closed its San Francisco office last year, and Lyft has delayed its return to operations until 2023 at the latest. Many companies that have reopened have done so on an optional basis.

Even Google, one of the most prominent tech companies when it comes to bringing employees back to the office, has backed off. The workers pushed back the demands, citing the company’s record profits last year. Management said 85% of requests for relocation or permanent telecommuting were approved.

“I couldn’t make a deal”

Tech companies with long-term leases are feeling the pain as commercial real estate in San Francisco has fallen, on average, to 30% to 40% below post-pandemic prices, market experts say.

Global logistics company Flexport, headquartered in Market Street, where it once housed 500 employees, has been unable to find a tenant to lease the space for more than two years.

“We listed our office through CBRE for sublease during the pandemic, but due to increased inventory and fierce competition in the sublease market, we were unable to close a deal,” Flexport Realtor Bill Hansen. property, it was said in the interview.

Flexport founder and outgoing CEO Ryan Petersen previously told CNBC that the company could not find anyone to fill the office. She attached a sad face emoji to her message and said: “Space is wonderful. we just signed on at high prices and the market was too soft through Covid.”

At Rincon Center, where Twilio is located, the food hall has been almost completely removed, except for a few longtime tenants. Across the street from One Market Plaza, Mediterranean restaurant Cafe Elena is the only open vendor. The remaining five have their lights off as of March 2020. One Market is home to Autodesk, several floors of Google offices and CNBC’s San Francisco studio.

“Everybody loses, it’s just a matter of how much,” said Colin Yasukochi, who heads CBRE’s Tech Insights Center.

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 San Francisco real estate picture. High-end areas are seeing record prices.

Last year, Salesforce listed space in its East Tower that Yelp and Sephora both subleased from the company. Terms were not disclosed, but real estate experts said they were expensive deals. In May, The Sobrato paid $71 million for a building in San Francisco’s South Market neighborhood, setting a record price of more than $1,700 per square foot.

Cushman and Wakefield’s Sammons said employers know they will have to offer more incentives to keep workers coming back, and that “it can’t just be a snack bar anymore.” They are making deals now to prepare for such a future.

“We’ve seen some really big deals and big tech companies are taking advantage of the market and realizing that they’re more comfortable going back to the office part-time and they’re going to need that,” Sammons said. “Those are the kind of companies that have the funds that are willing to do something like this.”

Waiting and hope for recovery

Analysts at Wells Fargo and others expect the downtown real estate market to recover significantly in 2024 and 2025. But there is no guarantee that San Francisco and surrounding cities in the East Bay and Silicon Valley will fully recover.

Home prices are still near the highest in the nation, and now interest rates are rising, making multimillion-dollar mortgages more expensive.

“Without a solution to the region’s affordable housing crisis, local companies will have a hard time convincing graduates to stay in the region,” Wells Fargo analysts wrote in a report this month titled “What’s Next for San Francisco’s Economy?”

“Bringing back the tech gold rush and convincing workers from other areas to move to the Bay Area will be a bigger challenge,” the analysts wrote. However, “while many companies have expanded or even moved out of the region. , the Bay Area still has the most complete tech ecosystem in the world,” they say.

Mayor Breed, who recently proposed a $14 billion annual budget for fiscal year 2022-23, recognizes that the world of work has changed. He’s counting on San Francisco’s cultural and tourism appeal to help with the renaissance.

“Our concerts, our activities, our conventions, a lot of things that people would want to come to a big city for, that’s what we need to focus on as well,” he told CNBC. “Working in an office is just going to be a change.”

The market faces additional potential shocks as real estate contracts expire in the next year or so. Experts say landlords will likely have to offer better terms to tenants who are considering leaving or at least downsizing.

Some small businesses have entered into revenue-sharing deals with landlords to reduce upfront costs and spread risk. Some are considering sharing space with other tenants in ways that have “never been done before,” Sammons said, calling it “a whole new world in some ways.”

Business in Luck’s clinic is inconvenient. He has been forced to downsize his staff and rely on loans that he says will take “probably the rest of my life” to pay off.

But Luck said he has seen phases of the cycle before and expects history to repeat itself.

“I’ve been through the dot-com bust and the housing bubble,” he said. “Recessions happen, and they also recover, eventually. My hope is that in four to five years it can be a more diverse population of businesses.”

— CNBC’s Yasmin Khorram contributed to this report

WATCH: CNBC’s one-on-one interview with San Francisco Mayor London Breed

Leave a Comment

Your email address will not be published.