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San Francisco is slow to recover from Covid, struggling for small businesses

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Airbnb-funded billboards show opposition to Proposition F in downtown San Francisco, California.

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The Marshall Rack chiropractic and massage clinic in downtown San Francisco survived the Covid-19 pandemic thanks to government stimulus and heavy debt. But more than two years after lockdowns swept the city, his business is only 70% back to his pre-pandemic levels.

Like many of his small business neighbors—those who somehow survived—fortune was waiting for San Francisco to pick up. He relies on technicians from large employers like Google and Salesforce, which is a challenge as these companies are flexible with requests to return to the office.

While big cities across the country are struggling to fully recover from the pandemic, San Francisco is on another level, with tech companies ending leases and residents seeking more affordable places to live. Mayor London Breed’s office estimates that one-third of San Francisco’s workforce is now remote and outside the city. Last year, he hit tax revenues by as much as $400 million, according to the General Accounting Office.

Downtown is finally coming to life. More traffic, fewer stores closing their doors, and some of the closed restaurants and cafes being replaced by new tenants. But the once-bustling sprawl of commerce still lies dormant, with merchants like Luck in a fog of uncertainty, hoping workers will eventually return.

“Most of our patient population is big business, and when they come back, it will help us stay stable,” Fortune told CNBC in an interview. That’s what we’re waiting for: recovery.”

Deepening the struggle is the reality that Covid hasn’t gone away. With the rise of Omicron BA.4 and BA.5 variants, the U.S. is now reporting an average of 126,000 cases per day as of this week, more than double what he was at the end of April. .

San Francisco Mayor London Breed speaks at a press conference about next steps she will take to replace three school board members who were safely recalled at City Hall in San Francisco, California, Wednesday, February 16, 2022. increase.

Gabriel Lurie | Photo San Francisco Chronicle | Hearst Newspaper via Getty Images

Bay Area commuters who take public transit still prefer to stay at home. His average daily ridership on the Bay Area Rapid Transit plummeted from his over 400,000 in 2019 to under 80,000 last year. By May, that number had grown to nearly 136,000 per weekday, according to the BART website.

“We still wear masks in the office, so it’s something that’s still very much in our psyche,” Luck said.

Transportation data reflects the real estate situation. San Francisco office vacancy rose to 24.2% in the second quarter from 23.8% in the previous quarter, according to CBRE research. Other major cities have historically high standards, but still fall short of San Francisco.

Manhattan hit a record 15.2% for the quarter. According to CBRE, downtown Atlanta has 22.8%, Chicago 21.2%, Los Angeles 21.8%, and Seattle 20.3%.

Robert Sammons, Regional Director of Cushman & Wakefield’s Northwest Research Team, said:

“Most employees want some degree of telecommuting when they return to the office, and many employers offer that as an option,” Breed said in a recent interview with CNBC.

San Francisco’s largest employer, Salesforce, announced last week that it was shrinking office space in the city again, listing 40% of the 43-story building across from the main Salesforce Tower. Coinbase closed its San Francisco office last year, and Lyft has pushed his return to the office as early as 2023. Most businesses that have reopened have reopened with voluntary attendance.

Even Google, one of the tech industry’s more vocal companies about returning staff to the office, has pulled out. Employees declined to comply, citing record profits the company made last year. Leadership said he approved 85% of requests for relocation or permanent remote work.

‘No deal was reached’

San Francisco commercial real estate prices are averaging 30% to 40% below pre-pandemic prices, according to market experts, and tech companies with long leases are feeling the pain.

Global logistics company Flexport, with offices in the heart of Market Street, which once housed 500 employees, has been unable to find a tenant to rent space for more than two years.

“We had offices listed for subleasing through CBRE during the pandemic, but due to increased inventory and intense competition in the subleasing market, we were unable to close the deal.” Property, Interview said in

Flexport founder and outgoing CEO Ryan Petersen previously told CNBC that the company couldn’t find anyone to take over. He attached a sad face emoji to his message and said, “The space is great. We just signed a high rate and the market has been very soft due to Covid.”

At the downtown Rincon Center where Twilio is located, the food court has been almost completely demolished and has two long-time tenants. Cafe Elena, a Mediterranean restaurant across from One Market Plaza, is the only vendor open. His other five remain lights out just like his March 2020. One market houses Autodesk, Google offices on multiple floors, and CNBC’s San Francisco studio.

Colin Yasukochi, who heads CBRE’s Tech Insights Center, said:

Salesforce Tower (left) and the Salesforce West office building in San Francisco, California, USA, Tuesday, February 23, 2021.

David Paul Morris | Bloomberg | Bloomberg | Getty Images

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

Last year, Salesforce listed space in the East Tower that both Yelp and Sephora subleased from the company. Terms were not disclosed, but real estate experts say it was a pricey deal. In May, the Sobrato organization paid his $71 million for a building in San Francisco’s South of Market neighborhood, setting a record for him over $1,700 per square foot.

Cushman & Wakefield’s Sammons said employers knew they needed to offer more incentives for employees to return to work and “can’t be just a snack bar anymore.” . In preparation for such a future, we are now trading.

“We’ve seen some really big deals. Big tech companies are taking advantage of the market and realizing they’re more comfortable going back to the office part-time and will need it going forward.” said Sammons. “They’re the kind of company that has the funds ready to do something like that.”

waiting for recovery

Wells Fargo analysts and others expect the downtown real estate market to rebound significantly in 2024 and 2025. But there is no guarantee that San Francisco and the surrounding East Bay and Silicon Valley cities will fully recover.

Home prices are still among the highest in the country, and now interest rates are skyrocketing, making mortgages over $1 million even more expensive.

Wells Fargo analysts asked this month, “What’s next for the San Francisco economy?”

“Reviving the technology sector gold rush fever and convincing workers from other regions to move to the Bay Area will be even more difficult,” analysts write. , the Bay Area still has the most complete tech ecosystem in the world,” they said.

Mayor Breed recently proposed a $14 billion annual budget for fiscal 2022-23, but acknowledged that the world of work has changed. She hopes San Francisco’s cultural and tourist attractions will help its recovery.

“Our concerts, our activities, our conventions, a lot of the things that people want to visit in the big cities are things that we also have to focus on,” she told CNBC. “Working in an office is just an adaptation to change.”

The market faces potential further turmoil as property contracts expire in the next year or so. Landlords are likely to be forced to vacate, or at least offer better terms to tenants who are considering downsizing, experts say.

Some small businesses have entered into revenue-sharing agreements with landlords to reduce initial costs and spread risk. Sammons said some have been discussing sharing spaces with other tenants in ways “never before,” calling it “a whole new world in a way.”

Business is run uncomfortably at Lac’s Infirmary. He had to cut staff and rely on loans. He said he would pay it off “probably for the rest of my life.”

But Luck has seen recessions before and expects history to repeat itself.

“I’ve been through the dot-com bust and the housing bubble,” he said. My hope is that in four to five years we will be a more diverse group of companies. “

— CNBC’s Yasmin Khorram contributed to this report

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