- By Patrick Hoge | Examiner staff writer
- Dec 30, 2024 (SFExaminer.com)
The last year was brutal on San Francisco’s downtown economy, with office vacancies rising to successive record highs before falling slightly, remote work still prevalent, tech layoffs proliferating and retail vacancies also hitting peaks amid a weak convention year and flagging tourism.
The good news, however, was that the office market showed some improvement at the end of the year, and The City’s travel marketing chief said a stronger convention calendar promised to bring more visitor spending to hotels, restaurants, bars and other retailers in 2025.
Post-COVID-19 doldrums continuing to smother downtown, which is The City’s economic core and its largest tax-revenue generator, bedeviled outgoing Mayor London Breed, and they will confront incoming Mayor-elect Daniel Lurie, who recently appointed Ned Segal, a former Twitter finance chief, to lead his downtown revitalization efforts as chief of housing and economic development.
Mayor Breed pursued numerous initiatives during the year aimed at stimulating a downtown revival, including:
• Offering hundreds of thousands of dollars to help establish a satellite campus of one of the schools known as historically Black colleges and universities. No public proposal was forthcoming.
• Subsidizing businesses to occupy vacant storefronts.
• Trying to pave the way for residential conversions of underutilized office buildings by getting voter approval in March of a transfer tax exemption for such projects. So far, there has been no rush of proposals.
• Sponsoring legislation to launch the state’s first “entertainment zone,” a designation for Front Street between California and Sacramento streets where people at events can buy and drink booze outdoors. The program, enabled by a state law authored by California state Sen. Scott Wiener, was a hit with area bar owners, who reported revenue jumps on Oktoberfest and Halloween, and The City subsequently added a dozen more entertainment zones, most downtown.
• And this month, hiring Biederman Redevelopment Ventures, the company that provides frequent programming in Salesforce Park as well as in New York City’s Bryant Park. Over the next year, the firm will bring 200 events to Union Square Park, the heart of an iconic shopping district marred in recent years by continuing storefront vacancies.
Independently of The City, meanwhile, private individuals and two community benefit districts wanting to help downtown launched a wildly popular monthly series of street parties on the first Thursday of each month that recently drew an estimated 18,000 people on one night to the stretch of Second Street roughly between Howard and Market streets where the events has been staged.
There were other bright spots, notably the September unveiling of a $250 million makeover of the Transamerica Pyramid complex and neighboring park by Michael Shvo, a New York developer with a strategy of offering super prime offices with high-end amenities that command top-dollar rents.
While Shvo said demand for his Transamerica offices was strong, The City’s office overall vacancy rate hit a record 36.9% for the third quarter before declining to 36.7% in the fourth quarter, according to preliminary data from the real-estate company CBRE.
Analysts said they were encouraged because leasing activity for the year was on track to hit the highest level since 2019 and they predicted the office market would start to slowly rebound in the coming year, though possibly after another dip.
Leasing activity was driven largely by demand from tenants whose leases were expiring and artificial-intelligence companies, many of them relatively small and having the potential to grow, said Alexander Quinn, senior director of Northern California research at JLL, another real-estate company.
Restoring a vibrant downtown economy will likely take substantial time, the experts said.
The coming year should be one in which “recovery becomes more evident and sustained in the economy and office market,” said Colin Yasukochi, executive director of CBRE Tech Insights, who said “a quick snapback” should not be expected.
“The San Francisco office market is in the process of bottoming out and beginning a new recovery phase,” Yasukochi said.
Weighing particularly heavily on downtown have been structural changes in the San Francisco labor market, perhaps most importantly the rise of remote work and the resulting rise in office vacancies at rates far above what was experienced after the dot-com bust circa 2001 and the Great Recession, said a November report by the City Controller’s office.
“Without the office workers, you don’t have the transit riders, you don’t have folks eating lunch. You don’t have as much gross receipts tax going to the city. You don’t have people in offices that generate business meetings and business travel, with people flying into San Francisco, so that branch of the hospitality industry has been greatly curtailed,” said Ted Egan, The City’s chief economist, in an interview.
“When that office market really works itself out, I think we will definitely see a stimulus downtown,” Egan said.
One notable change was when Salesforce, The City’s largest private employer, started requiring employees to be in offices more often starting in October, the controller said in a separate November report on the state of the economy. Amazon CEO Andy Jassy also announced in September that in January it will require workers to be in person five days a week.
There was an uptick in Muni Metro and BART ridership in September and October, the controller’s office said.
Yet the same numbers show how far there is to go. MUNI Metro boardings were still about 60% of what they were pre-pandemic, while BART exits at downtown stations were less than 40% of what they were the same month in 2019.
Meanwhile, weekly return-to-office data was flat during fiscal year 2023-24, with attendance in San Francisco offices at 42% of 2019 levels in both July 2023 and July 2024, as counted by the building-security company Kastle, the controller’s office said.
The post-pandemic recovery’s weakness has also been exacerbated by the first significant tech industry downturn in a decade and a half, with layoffs and other job losses in The City over the last two years erasing employment gains largely driven by tech that had accumulated between 2020 and the middle of 2022, Egan said.
The unemployment rate in San Francisco was 3.7% in November, lower than for the state and nation as a whole.
“We basically gave back all of that growth,” said Egan, who said he was looking forward to more tech hiring again, though he wondered whether that would translate into demand for office space.
Downtown’s woes have been compounded by weakness in the hotel sector, Egan said. Monthly hotel occupancy was 64% in October, down from 82% for the same period in 2019, according to city data.
The hotels’ bottom lines have suffered in part because business tourism has been weak as a result of people conducting so much business by video, which reduces the need for in-person visits, Egan said.
On the leisure side, meanwhile, tourism from China has not recovered since the pandemic, he said.
The convention business, however, is looking up. The City’s travel marketing arm projects the number of group hotel nights taken next year will increase by 59%, with 659,700 hotel room nights linked to 30 events at Moscone Center, as compared to 400,000 this year.
“That’s massive,” said Anna Marie Presutti, president and CEO of San Francisco Travel.
A major win was getting Microsoft to hold its Ignite conference in San Francisco next November, Presutti said. The event is forecasted to generate $41.5 million in direct spending and account for 61,510 hotel room nights.
Also confirmed for next year and the two following years as well is Dreamforce, Salesforce’s annual extravaganza, Presutti said.
Convention officials knew in advance that 2024 was going to be a light year for various reasons, but negative headlines about the city, particularly concerning crime and the condition of the streets in the wake of the pandemic, did not help. Perceptions of The City have been changing, though, for the better, Presutti said.
“I think we’re all ready to turn the page,” Presutti said. “We’re moving forward, and it looks better than it’s looked in a long time.”
