San Francisco collected even less tax than it expected on real estate sales in the last fiscal year, as investors continued to wait for the city’s battered downtown office market to rebound.
Transfer tax revenue — the money the city collects from real estate sales — plummeted to its lowest level in more than a decade in the year ended June 30, according to a report by the city controller’s office.
Collections totaled $177.7 million in fiscal 2023-2024, “as few large office buildings traded hands, and those that did, traded at reduced prices,” explained city controller Greg Wagner in the Annual Comprehensive Financial Report.
Transfer tax revenue has been on a downward spiral in recent years in San Francisco as its downtown office buildings languish, but last year it hit a new low it hasn’t reached since the years after the Great Recession, noted the report.
“It reflects the fact that borrowing costs are high, and there are not a lot of transactions of commercial property happening, so the revenue results are not a big surprise,” Michelle Allersma, budget and analysis director for the controller’s office, told CoStar News.
But the controller predicted back in 2023 that transfer tax revenues would reach a low point that year and begin bouncing back by fiscal 2024, “to reflect a multiyear recovery in the commercial real estate sector,” according to the report.
Budget cuts
The subsequent drop in transfer tax revenue in the past fiscal year suggests the city’s previous projections underestimated how long it could take for San Francisco's downtown commercial real estate market to stabilize. The city projected transfer tax revenues at $222 million for fiscal year 2024, 20% more than was actually collected.
The report warned that the shortfall, and the risk of a similar one next year, could suggest a need for new budget cuts.
Transfer tax is considered notoriously volatile since “the vast majority of the revenue comes from a very small number of high-value sales,” explained Allersma, which historically has meant the transfer of commercial buildings in downtown San Francisco. Moreover, the report noted that transfer tax is “highly dependent on conditions in the local economy.”
In an example of that volatility, the city earned “a historic high of $520.3 million” in fiscal 2021-2022 transfer taxes, buoyed by several big property deals such as the purchase of Pacific Gas and Electric Co.'s former downtown headquarters for $800 million and the about $1 billion sale of the Exchange in Mission Bay.
San Francisco voters in November passed a ballot measure that aims to reduce the city’s dependence on this volatile revenue source by spreading the tax burden across a greater number of businesses and create greater predictability for both businesses and the city budget.
San Francisco is one of the hardest hit office markets in the nation as it continues to reel from the after-effects of the COVID-19 pandemic, when much of the city’s tech-heavy workforce suddenly turned remote. But leasing conditions have improved in 2024 — though they are still running at around half of their pre-pandemic levels — according to CoStar, and office vacancy rates stayed relatively flat in 2024, giving investors hope that a recovery might be imminent.
The recent financial report released by the city cautioned that office vacancy rates are not projected to bounce back to pre-pandemic levels in the next 10 years as the city’s economy remains dominated by the volatile technology sector.
“[Fiscal year] 2023-2024 revenue results and initial [fiscal year] 2024-2025 data indicate the pace of the city’s recovery from the pandemic continues to be gradual,” it said.