Downtown San Francisco is facing a record-high vacancy rate in its commercial real estate sector, pushing the city closer to a breaking point. With more people working from home and companies choosing not to return to downtown areas, businesses are leaving, and new ones are not moving in. The situation has created a cycle of doom, with San Francisco facing an $800 million budget deficit and a decrease in tax revenue from the once-bustling downtown core.
The vacancy rate has reached 29.5%, much higher than during the dot-com bust or the Great Recession. As office leases expire, spaces are becoming vacant unless reoccupied. The current average term remaining for office leases in San Francisco is about three years, with around 4 million square feet expected to become vacant once they expire.
The city’s reliance on the tech industry, which has adapted to remote work more readily than other sectors, has contributed to the decline of its downtown core. With fewer people commuting to downtown areas, foot traffic and revenue for small businesses have also decreased.
Some landlords are deciding that owning real estate in San Francisco is no longer worth it. Real estate firm Redco Development and its investment partner AEW Capital Management, for example, walked away from the historic One Montgomery Street building that they purchased for $84 million in 2019. Other buildings are receiving offers at a quarter of their pre-pandemic value, as the market struggles to find its footing.
As the city grapples with crime, drug addiction, and other social issues, businesses are increasingly reluctant to operate in downtown San Francisco. The situation is not unique to the city, with many downtown areas across the United States facing similar challenges. As the cycle of doom continues, the question remains whether there is enough revenue to prevent these cities from going under.
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