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 weathered the Covid-19 pandemic thanks to government stimulus money and high levels of debt. But well over two years since lockdowns swept the city, its business has only recovered to 70% of pre-pandemic levels.

Like his many small business neighbors – those who have managed to stay afloat – Luck has been waiting for San Francisco to recover. He relies on tech staff at big employers like Google and Salesforce, which poses a challenge because those companies are flexible when it comes to going back to the office.

While major cities across the country are struggling to fully recover from the pandemic, San Francisco is on a different level as tech companies are giving up leases and residents are looking for cheaper locations. The Office of San Francisco Mayor London Breed estimates that a third of San Francisco’s workforce now works remotely and out of town. Last year, this resulted in a whopping $400 million loss in tax revenue, according to the Office of the Controller.

Downtown is finally showing some life. There’s more foot traffic, fewer shops are boarded up, and some closed restaurants and cafes have been replaced with new tenants. But huge, once-buoyant trade flows remain dormant, and traders like Luck find themselves in a fog of uncertainty, hoping workers will eventually return.

“Most of our patient population is the larger companies, and if they come back it will help us remain stable,” Luck said in an interview with CNBC. “That’s what we’re holding on to — this recovery.”

Deepening the fight is the reality that Covid will not go away. With the rise of subvariants omicron BA.4 and BA.5, the US has been reporting an average of 126,000 cases per day since this week, more than double the rate at the end of April.

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

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Bay Area commuters who use public transportation prefer to stay at home. Average daily ridership on the Bay Area Rapid Transit dropped from over 400,000 in 2019 to under 80,000 last year. By May, the number had risen to nearly 136,000 a 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 reflect the real estate picture. The office vacancy rate in San Francisco rose to 24.2% in the second quarter from 23.8% in the same period last year, according to CBRE research. Other major cities are at historically high levels, but still below San Francisco.

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

“We’re slower than New York, we’re slower than Chicago, and it has to be because we’re so reliant on technology,” said Robert Sammons, regional director of the Cushman and Wakefield Northwest research team.

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

Salesforce, San Francisco’s largest employer, announced last week that it was again shedding its office space in the city, now listing 40% of a 43-story building across the street from the main Salesforce tower. Coinbase closed its San Francisco office last year, and Lyft has delayed its return to the office until 2023 at the earliest. Most businesses that have reopened did so with optional attendance.

Even Google, one of the most vocal tech companies when it comes to getting employees back into the office, has backed down. Workers pushed back demands, citing record profits the company made last year. The leadership said it has approved 85% of requests for relocation or permanent remote work.

“Can’t make a deal”

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

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

“We have listed our office for sublease through CBRE throughout the pandemic, but due to increasing inventory and intense competition in the sublease market, we have not been able to secure a deal,” Bill Hansen, global head of real at Flexport Immobilien, said in an interview .

Flexport founder and outgoing CEO Ryan Petersen previously told CNBC that the company couldn’t find anyone for the post. Adding a sad emoji to his message, he said: “The space is great – we just signed at high rates and the market has been super soft through Covid.”

At the Rincon Center downtown, where Twilio is located, the food court has been almost entirely stripped save for a few longtime 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 since March 2020. One market houses Autodesk, several floors of Google offices, and CNBC’s San Francisco studio.

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

The Salesforce Tower (left) and Salesforce West office building in San Francisco, California, on Tuesday, February 23, 2021.

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There’s another side to the real estate picture of San Francisco. High-end rooms are seeing record prices.

Last year, Salesforce listed space in its east tower that Yelp and Sephora both had subleased from the company. Terms were not disclosed, but real estate experts say the deals were expensive. In May, the Sobrato organization paid $71 million for a building in San Francisco’s South of Market neighborhood, setting a record over $1,700 per square foot.

Sammons, of Cushman and Wakefield, said employers knew they needed to give workers more incentives to come back and that “it can’t be just a snack bar anymore.” They’re transacting now to prepare for that kind of future.

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

Wait and hope for recovery

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

Home prices are still near the highest in the country, and now interest rates are skyrocketing, making mortgages over a million dollars even more expensive.

“With no solution in sight to the region’s affordable housing crisis, local businesses will struggle to persuade graduates to stay in the region,” Wells Fargo analysts wrote this month in a report titled “What next for the San Francisco economy?”.

“Bringing back the gold rush fever to the tech sector and convincing workers from other areas to move to the Bay Area will be an even greater challenge,” the analysts wrote. However, “while many companies have expanded or even relocated outside of the region, the Bay Area still possesses the most complete technology ecosystem in the world,” they said.

Mayor Breed, who recently proposed an annual budget of $14 billion for fiscal year 2022-23, acknowledges that the world of work has changed. She’s counting on San Francisco’s cultural and tourist appeal to help revitalize it.

“Our concerts, our activities, our conventions, a lot of the things that people want to go to a big city for, that’s what we have to focus on as well,” she told CNBC. “Working in the office will only be an adaptation to change.”

The market faces additional potential turbulence as property contracts expire in the next year or so. Landlords are likely to be forced to offer better terms to tenants considering moving away, or at least downsizing their size, experts said.

Some small businesses have entered into revenue-sharing agreements with landlords to reduce upfront 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 a way.”

Business is uncomfortable in Luck’s clinic. He’s had to downsize and rely on loans he said he’ll “probably have for the rest of my life” to repay.

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

“I went through the dot-com bust and the real estate bubble,” he said. “Recessions happen and eventually they recover. I hope that in four to five years there could be a more diverse corporate population.”

— CNBC’s Yasmin Khorram contributed to this report

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

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