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 money and a large amount of debt. But more than two years since lockdowns swept across the city, its business has only returned to 70% of pre-pandemic levels.

Like his many small-business neighbors who have managed to stay afloat, Luck has been waiting for San Francisco to bounce back. It relies on tech workers from massive employers like Google and Salesforce, which is a challenge because those companies are being flexible with back-to-the-office demands.

While major cities across the country struggle to fully recover from the pandemic, San Francisco is on another level as tech companies shed leases and residents seek more affordable locations. San Francisco Mayor London Breed’s office estimates that a third of San Francisco’s workforce is now remote and outside the city. Last year, that was a $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 There is more foot traffic, fewer stores are closed, and some restaurants and cafes that closed have been replaced by new tenants. But large areas of once-vibrant commerce remain dormant, and merchants like Luck find themselves in a fog of uncertainty, hoping that workers will eventually return.

“The majority of our patient population is the larger companies, and as they come back, it will help keep us stable,” Luck told CNBC in an interview. “That’s what we’re waiting for — that recovery.”

Deepening the fight is the reality that Covid is not going away. With the increase in omicron subvariants BA.4 and BA.5, the United States is now 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 news conference about the next steps he will take to replace three school board members who were successfully recalled at City Hall Wednesday, Feb. 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 home. Average daily ridership 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 per weekday, according to BART’s website.

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

Transport data reflects the real estate image. The office vacancy rate 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 hit 21.2 percent, Los Angeles touched 21.8 percent and Seattle is at 20.3 percent, CBRE said.

“We’re slower than New York, we’re slower than Chicago, and it has to do with such a strong reliance on technology,” said Robert Sammons, regional director of Cushman & 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 offer that as an option.”

Salesforce, San Francisco’s largest company, said last week it was cutting back on its office space in the city, now occupying 40 percent of a 43-story building that fronts the tower main Salesforce. Coinbase closed its San Francisco office last year, and Lyft has pushed its return to the role until 2023 at the earliest. Most businesses that have reopened did so with optional assistance.

Even Google, one of the most vocal companies in tech when it comes to bringing employees back to the office, has pulled back. The workers rejected the demands, citing the record profits the company generated last year. Leadership said it has approved 85% of requests for relocation or permanent remote work.

“I could not reach an agreement”

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

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

“We have had our office listed through CBRE for sublease throughout the pandemic, but due to increased inventory and fierce competition in the sublease market, we have been unable to come to an agreement,” Bill Hansen, Global Head of Realty at Flexport. heritage, he said in an interview.

Flexport founder and outgoing CEO Ryan Petersen previously told CNBC that the company was unable to find anyone to fill the office. He attached a sad face emoji to his message and said: “The space is great – we just signed at high prices and the market was very soft through Covid.”

In downtown Rincon Center, where Twilio is located, the restaurant space has been almost completely gutted, save for a couple of 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 is home to Autodesk, several floors of Google offices and CNBC’s San Francisco studio.

“Everybody is losing; it’s just a matter 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.

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There is another side to San Francisco’s real estate picture. High-end spaces are seeing record prices.

Last year, Salesforce included space in its east tower, which Yelp and Sephora subleased to the company. Terms were not disclosed, but real estate 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 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’re making deals now to prepare for that kind of future.

“We’ve seen some big deals and big tech companies take advantage of the market and realize they’re more comfortable going back to the office part-time and they’re going to need that later,” Sammons said. “They’re the kind of companies that have funds ready to do this kind of thing.”

Waiting and waiting for recovery

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

Home prices remain near the highest in the country and interest rates are now jumping, making multimillion-dollar mortgages even more expensive.

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

“Recovering from the tech sector’s gold rush, and convincing workers from other areas to move to the Bay Area, will be even more of a challenge,” the analysts wrote. However, “while many companies have expanded or even moved out of the region. , the Bay Area still possesses the most comprehensive technology ecosystem in the world,” they said.

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

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

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

Some small businesses have worked out revenue-sharing arrangements with owners to ease start-up costs and spread the risk. Some are talking about 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, business runs awkwardly. He has had to cut staff and rely on loans he said he will pay off “probably for the rest of my life.”

But Luck said he’s seen cycles go down 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 four or five years from now, it can be a more diverse population of businesses.”

— CNBC’s Yasmin Khorram contributed to this report

I WILL SEE: CNBC one-on-one interview with San Francisco Mayor London Breed

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