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 incentives and heavy debt. But more than two years since lockdowns gripped the city, its business has returned to just 70% of pre-pandemic levels.

Like many of its small business neighbors — those that have managed to stay afloat — Luck has been waiting for San Francisco to recover. It relies on tech workers at huge 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 another level as tech companies get out of leases and residents rush to 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 resulted in a whopping $400 million hit to tax revenue, according to the Comptroller’s Office.

The center is finally showing some life. There’s more foot traffic, fewer stores are boarded up, and some restaurants and cafes that closed have been replaced by new tenants. But vast, once-bustling swaths of commerce remain dormant, and merchants like Luck are in a fog of uncertainty, left to hope that workers will eventually return.

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

Compounding the struggle is the reality that Covid is not going away. With the rise in omicron BA.4 and BA.5 subvariants, the US 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.

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

Bay Area commuters who use public transportation still prefer to stay home. Bay Area Rapid Transit’s average daily ridership fell from more than 400,000 in 2019 to under 80,000 last year. As of May, that number had increased to nearly 136,000 per weekday, according to BART’s website.

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

Transportation data reflects the real estate picture. San Francisco’s office vacancy rate rose to 24.2 percent in the second quarter from 23.8 percent in the prior period, according to a CBRE survey. Other major cities are at historic highs, but still below San Francisco.

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

“We’re slower than New York, we’re slower than Chicago, and it really has to do with being so heavily dependent 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 once again downsizing its office space in the city and has now listed 40 percent of a 43-story building that is 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 companies that have reopened have done so with a casual presence.

Even Google, one of the loudest companies in tech when it comes to bringing staff back to the office, has pulled back. The workers rejected the 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 make a deal”

Tech companies with long-term leases are feeling the pain as commercial real estate in San Francisco has fallen an average of 30 percent to 40 percent 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 to occupy the space for more than two years.

“Our office was listed through CBRE for sublease during the pandemic, but due to increasing inventory and fierce competition in the sublease market, we were unable to close a deal,” Bill Hansen, global head of Flexport real estate, said in an interview.

Flexport founder and outgoing CEO Ryan Petersen previously told CNBC that the company could not find anyone to take over the office. He attached a sad face emoticon to his message and said: “The space is great – we just signed with high rates and the market was super soft through Covid.”

Downtown Rincon Center, where Twilio is located, has seen the food court almost entirely removed, save for a few longtime tenants. Across the street at One Market Plaza, Mediterranean restaurant Cafe Elena is the only vendor open. The lights in the other five remain off, as they have been since 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 Technical Insights Center.

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

David Paul Morris | Bloomberg | Getty Images

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

Last year, Salesforce announced space in its east tower that Yelp and Sephora leased from 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 bring workers back 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 big tech companies take advantage of the market and realize they’re more comfortable going back to the office part-time and they’ll need it later,” Sammons said. “They’re the kind of companies that have the funds willing to do this kind of thing.”

Waiting and hoping 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 surrounding cities in the East Bay and Silicon Valley will fully recover.

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

“With no solution in sight to the region’s affordable housing crisis, 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’s Next for San Francisco’s Economy?”

“Bringing back the tech gold rush and persuading 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 has the most complete technology 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. She’s counting on San Francisco’s cultural and tourist appeal to help with the revitalization.

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

The market faces further potential shocks as real estate contracts expire next year. 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 landlords to ease upfront costs and spread risk. Some are discussing sharing spaces with other tenants in ways that have “never been done before,” Sammons said, calling it “a whole new world in a way.”

At Luck’s clinic, business is running rough. He has had to cut staff and rely on loans he said he will pay off “probably for the rest of his life.”

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

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

— CNBC’s Yasmin Khorram contributed to this report

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

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