San Francisco's leaders, facing record-high office vacancies and little demand for the space, are trying to take matters into their own hands to inject some activity back into the downtown.
Mayor London Breed is asking the city's public sector to move some government employees to some of the empty buildings scattered throughout the central business district. She's hoping the move will help remedy the unprecedented amount of available office space and kick-start some momentum among other prospective tenants that may now be hesitant to take on the space.
“As the largest employer in the city we can lead on recovery by investing in high-quality office space for our workers,” Breed wrote in a letter to the city's Board of Supervisors, adding that the shift to hybrid work has “resulted in an overall reduced demand for office space and correspondingly lower rents for high quality buildings.”
The situation in San Francisco has become increasingly dire compared with other cities throughout the United States as office vacancy rates have shot beyond 17% — compared to roughly 7% in 2019, according to CoStar data. In some pockets of downtown, the availability rate is nearly 30%, and with leasing activity largely muted, there are no signs of an imminent turnaround.
The combination of remote work, record-high sublease availability and office vacancy rates, as well as worsening socioeconomic conditions prompting corporate cutbacks, have stewed since the beginning of the pandemic, contributing to a nearly $800 million budget deficit. What's more, office leasing and investment activity is a small fraction of what it was prior to 2020, meaning that source of critical tax revenue is unlikely to return anytime soon.
“While this poses a challenge to the city’s finances and its overall economic recovery, it also presents a critical opportunity for the city government to be strategic about its own use of office space,” Breed wrote. “The city alone cannot fix all of the problems impacting downtown San Francisco; however, we can lead the path toward recovery.”
The mayor's proposal is homing in on employees working for the San Francisco Unified School District, San Francisco City College as well as the city administrator’s office, the last of which includes the department that operates real estate services for more than 25 agencies across the city.
'About What's Possible'
The proposal to move city office workers to San Francisco's Financial District is part of a collection of efforts Breed and other officials have pitched to rebuild momentum the city's office market lost to the pandemic. It coincides with recent ordinances the San Francisco Board of Supervisors approved to help support the city's economic revitalization after years of depressed leasing activity, nonexistent sales momentum, and an exodus of office and retail tenants.
Some of those ordinances include cutting some of the development red tape that has made it especially complicated to build new projects in the city along eliminating zoning restrictions to make it easier to repurpose buildings for different uses.
Any major legislative change takes time, and it remains unclear whether investors, developers or companies looking to grow are willing to bet on San Francisco's recovery.
For now, Breed is hoping the city can adopt a more proactive approach in leading its recovery. She has asked several entities to provide information on their office footprints, including details about where each one leases or owns space; hybrid-work patterns among department employees; the annual costs associated to maintain their real estate portfolios; along with any alternative options the city should consider to “best support San Francisco’s economic recovery with near-term investments, consolidations, and/or adjustments in our office real estate portfolio.”
Breed told the Board of Supervisors this week that "it's about what's possible. We aren't saying that all of this is absolutely going to happen, but all of it can happen and that's what we need to start thinking about."