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 a substantial amount of debt. But well over two years since the blockades hit the city, his business has only returned to 70% of pre-pandemic levels.

Like its many small business neighbors – the ones who managed to stay afloat – Luck waited for San Francisco to recover. It relies on technology operators from huge employers like Google and Salesforce, which is a challenge because those companies are flexible with back-to-office requests.

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

The center finally shows some life. There is more foot traffic, fewer shops are closed with boards, and some restaurants and cafes that have closed have been replaced with new tenants. But vast areas of once vibrant trade remain dormant, and merchants like Luck are in a mist of uncertainty, left to hope that workers will eventually return.

“The majority of our patient population is made up of larger companies, and when they return, it will help us stay stable,” Luck told CNBC in an interview. “This is what we are clinging to: that recovery.”

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

San Francisco Mayor London Breed speaks at a press conference about the next steps he 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 Newspapers via Getty Images

Bay Area commuters who take public transit still prefer to stay at home. The average daily number of passengers on Bay Area Rapid Transit dropped from more than 400,000 in 2019 to less than 80,000 last year. By May, the number had risen to nearly 136,000 on weekdays, 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 real estate picture. The vacancy rate for offices in San Francisco 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 hit an all-time high in the quarter of 15.2%. Downtown Atlanta is at 22.8 percent, Chicago at 21.2 percent, Los Angeles at 21.8 percent, and Seattle at 20.3 percent, CBRE said.

“We are slower than New York, we are slower than Chicago, and that must be related to being so heavily dependent on technology,” said Robert Sammons, regional director of Cushman and the Wakefield research team in the Northwest.

Mayor Breed told CNBC in a recent interview that “most employees want some level of work from home on their way back to the office and many employers are providing it as an option.”

Salesforce, San Francisco’s largest employer, said last week that it was once again cutting its offices in the city and is now listing 40% of a 43-story building across the street. compared to the main Salesforce Tower. Coinbase closed its San Francisco office last year, and Lyft pushed his return to office until 2023 at the earliest. Most of the companies that reopened did so with optional participation.

Even at Google, one of the most knowledgeable tech companies when it comes to getting people back to the office, has retired. Workers rejected the claims, citing the record profit the company generated last year. Leadership said it approved 85% of permanent remote work or relocation requests.

“I have not been able to close a deal”

Tech companies with long-term leases are suffering, as commercial real estate in San Francisco has, on average, dropped 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, hasn’t been able to find a tenant to rent the space in more than two years.

“We listed our office through CBRE for subletting during the pandemic, but due to increased inventory and fierce competition in the subletting market, we were unable to conclude a deal,” Bill Hansen, Global Head of Industry Flexport real estate estate, he said in an interview.

Flexport founder and outgoing CEO Ryan Petersen had previously told CNBC that the company couldn’t find anyone to take over the office. He attached an emoji with a sad face to his message from him and said: “The space is great: we just signed at high rates and the market has been super soft thanks to Covid.”

In the center of Rincon Center, where Twilio is located, the food court has been almost completely stripped, except for a couple of longtime tenants. Across the street in One Market Plaza, Cafe Elena Mediterranean restaurant is the only open vendor. The lights of the other five remain off just as they were in March 2020. One Market is home to Autodesk, several floors of Google’s offices and CNBC’s San Francisco studio.

“Everyone is losing ground, it’s just a question of how much,” said Colin Yasukochi, who heads CBRE’s Tech Insights Center.

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

David Paul Morris | Bloomberg | Getty Images

There is another aspect of the San Francisco real estate picture. High-end spaces are seeing record prices.

Last year, Salesforce put the space in its east tower up for sale, which Yelp and Sephora both sublet from the company. The terms were not disclosed, but real estate experts say it was expensive business. In May, The Sobrato organization paid $ 71 million for a building in San Francisco’s South of Market neighborhood, setting a record of more than $ 1,700 per square foot.

Sammons of Cushman and Wakefield said employers know they will need to offer more incentives for workers to return and that “it can no longer be just a snack bar.” They are transacting now to prepare for that kind of future.

“We’ve seen some really big deals and the 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 it along the way,” Sammons said. “They are the kind of company that has funds ready to do this kind of thing.”

Waiting and hoping for healing

Analysts at Wells Fargo and others expect the downtown area 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 they will fully recover.

Home prices are still close to the highest in the country and now interest rates are climbing, making million dollar mortgages even more expensive.

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

“Bringing back the tech industry’s gold rush fever and convincing workers from other areas to relocate to the Bay Area will be even more of a challenge,” analysts wrote. However, “while many companies have expanded or even moved out of the region, the Bay Area still has 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. He counts on San Francisco’s cultural and tourist appeal to help with a renaissance.

“Our concerts, our activities, our conventions, many of the things that people would like to visit a big city for is what we need to focus on,” he told CNBC. “Working in the office will be just an adaptation to change”.

The market faces further potential turmoil as real estate contracts expire in the next year or so. Landlords are likely to be forced to offer better terms for 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 upfront costs and spread risk. Some are discussing sharing space with other tenants in ways that “have never been done before,” Sammons said, calling it “a whole new world in some ways.”

At Luck’s clinic, business is bad. She has had to cut her staff and rely on loans that she said she will pay off “probably for the rest of my life”.

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

“I’ve been through the dot-com crash and the housing bubble,” he said. “Recessions happen and eventually recover. My hope is that in four or five years it can become a more diverse business population.”

– CNBC’s Yasmin Khorram contributed to this report

LOOK: CNBC Individual Interview with the Mayor of San Francisco London Breed

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