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‘Blowing a hole in our budget’: SF grapples with massive fiscal hit of remote work

Pedestrian on Battery Street in Downtown San Francisco, Calif., on Wednesday, September 7, 2022. | Camille Cohen/The Standard

San Francisco could see nearly a billion dollars stripped from its budget over the next six years because of the cascading impact of remote work on the city’s economy.

Those revenue losses could grow to as much as $200 million annually, according to a model presented by city economist Ted Egan at a San Francisco Board of Supervisors committee hearing Wednesday. The Controller’s Office prepared the report in response to inquiries from Supervisors Catherine Stefani and Ahsha Safaí about the impact of empty offices on the city.

“Today it is clear to me and many of us that full-time in person work that our economic core is counting on is not returning to the same level as it has without incentives or policy changes,” Safaí said. “We are facing a significant iceberg coming to us in the City and County of San Francisco.”

Property taxes are San Francisco’s biggest source of tax revenue, bringing in more than $2 billion to the city’s general fund in the last fiscal year. The office sector represents around 18% of property tax revenue, meaning long-term office vacancies come with significant stakes. 

Total vacancies in San Francisco are tagged at around 24%, breaching highs seen during the dot-com crash and the Great Recession, and are poised to rise further as leases run over the next few years. Real estate services firm JLL projects vacancies rising as high as 30% by the end of next year. 

The Controller’s Office estimated that losses from 2023 through 2028 could range from $500 million to more than $870 million. 

Safai compared the impact to “blowing a hole in our budget.”

There are some forces, namely long lease terms and Prop. 13, that can serve to cushion the city’s budget from a sudden collapse in property tax revenue. Still, budget analysts say if remote work permanently reduces office demand, “eventually the city will see sizable reductions in property tax revenue from offices.”

“Under no scenario are we anywhere back to normal by 2026,” Egan said. 

He added that high-interest rates correspond to a higher rate of return from real estate required by investors, adding more downward pressure on property values.

Data presented by Egan shows that while San Francisco’s overall office vacancy rates are below that of Dallas and Houston, the city’s vacancies rose more than any major metro area during the pandemic.  

“San Francisco is particularly vulnerable to this because office space industries contribute about 72% of our GDP,” Egan said. “So if anything happens to the office sector, it ripples throughout virtually every aspect of the city’s economy.”

Joaquín Torres, the city’s assessor-recorder, presented data showing an uptick in the number of property tax appeals filed by property owners in the city. As of the end of September, property owners have filed 2,577 appeals for the current fiscal year, more than 1,000 more than the 1,417 appeals filed in the 2020 fiscal year. 

But the hit to offices and associated property taxes are only one aspect of the larger fiscal shock that the city may face. 

Safaí raised the issue of how the economic shifts in the city—and fears of a forthcoming recession—will also negatively affect business tax revenue and transfer tax revenue from the sale of commercial properties.    

Egan said the Controller’s office is currently working on gauging what these revenue hits might be, and plans to present those findings as part of their budget forecast released in early December. 

Although offices account for a minority of the property tax revenue for the city, office demand drives demand for other types of real estate in San Francisco, according to Egan. The next domino to fall could be housing prices, which have already started to show signs of a cooldown. 

Egan also threw some cold water on the idea that large-scale conversions of underused office buildings to housing could be a savior for the city, at least in the short term.

“As a general principle, I don’t expect it to happen. Office demand drives housing demand,” Egan said. “For a developer facing rising construction costs and seeing falling and uncertain revenues, then there’s really no incentive for them to do that at this time.”