In San Francisco, office vacancies are surging, rents are plummeting and the city’s downtown—once buzzing with energy and activity—can’t shake a general feeling of desolation.
Its less glamorous neighbor to the south, San Jose, is facing many of the same existential challenges—or at least it should be. But by many measures, San Jose has proven much more resilient: Office demand is rising, the city lost fewer residents during Covid and the stodgy corporate giants that make up its largest employers aren’t going anywhere.
San Francisco’s total vacancy rate jumped from less than 4% in 2019 to 28% today, according to the real estate company CBRE, and Silicon Valley has a vacancy rate of 14%, lower than the national average.
The two Bay Area metros—both tech-dominant and just a train ride apart—are world apart in how they’ve recovered from Covid. The question is: Why?
Betting on Blue Chippers
Mark Ritchie has worked as a commercial real estate broker in San Francisco and San Jose for four decades, and said talk about the two cities has changed since the pandemic.
Ritchie, who makes the drive between the two cities on a near-daily basis, said he was once constantly asked the question, “What is wrong with San Jose?” Now the question he’s hearing most is, “What’s wrong with San Francisco?”
“Down here, we have everything, and it’s all mixed up. We’ve got office, research and development, warehouse, industrial, giant lifestyle shopping centers,” Ritchie said of San Jose. “Whereas the more pure financial office tenant market in San Francisco has just been devastated.”
Ritchie said Silicon Valley’s strength lies in the diversity of its commercial space and the companies that occupy it. While Downtown San Jose is struggling more than other parts of Silicon Valley, it is a relatively small part of the larger pie.
Colin Yasukochi, the executive director of the CBRE Tech Insights Center, pointed to the larger, more mature public companies like Apple, Google and Intel that define Silicon Valley. By contrast, the tech boom that reshaped San Francisco last decade was driven by startups and younger software companies that pivoted easily to remote work.
“The manifestation of remote and hybrid work is again most concentrated in San Francisco,” according to Yasukochi. To better compete for talent, other local industries like finance have followed tech’s lead on remote work, he said.
While Silicon Valley giants have also loosened in-office requirements, large employers have generally been loath to cut back on office space.
Major Silicon Valley companies like Apple and Google have mandated in-person work at least three days a week. But many large San Francisco employers, including DoorDash, Dropbox and Airbnb, have taken the opposite tack with no defined office plans and liberal remote work policies.
That could change as the economy slumps, however: Marc Benioff, CEO of San Francisco’s largest private employer Salesforce, has waffled on remote work but recently required sales employees return to the office.
“The feeling from many [Silicon Valley] companies is to take a conservative approach and keep the office space on the books because if people do come back at a much higher rate than expected, you can run out pretty quickly,” Yasukochi said.
That difference in tenant stability means a healthier market for buyers compared with San Francisco, where some properties have been pulled from the market after massive drops in value.
Spending on office and R&D buildings in Silicon Valley ballooned to a record $8.7 billion in 2021; San Francisco’s number is less than half of that.
Steeper Busts, Steeper Booms
Historically, San Francisco has been marked by bigger booms and steeper busts than its counterpart in South Bay.
That was the case during the office building boom of the 1980s, the dot-com bust, the Great Financial Crisis and social media boom of the last decade.
If San Jose's deep bench of engineering talent represents the “muscle” of the region’s economy, San Francisco is the “face,” where ideas are sold to the world.
“Silicon Valley is just an unbelievably productive place for business, whereas people are more in San Francisco for the lifestyle or the incredible beauty,” Ritchie said. “Nobody is in San Jose for the scenery or the nightlife, if we’re being honest.”
But priorities changed during the pandemic, when people fled dense urban spaces in search of more space.
San Francisco’s population fell by 6.3% during the first year of the pandemic, the most of any major city in the U.S., according to U.S. Census data. Santa Clara County’s population decline was 2.3% over the same period.
Ted Egan, San Francisco's chief economist, said the city's tech industry grew a lot faster than the South Bay starting around 2010. But what helped drive commercial real estate demand—proximity to public transit—has become a negative as more commuters choose private cars over buses and trains.
Automobile traffic has nearly returned back to pre-pandemic levels, while public transit ridership lags far far behind 2019 numbers. BART, in particular, is hurting more than most large transit agencies.
Although an aversion to transit is part of the reason for South Bay’s faster bounceback, Egan said South Bay’s housing market recovery suggests Silicon Valley will see stronger population growth than San Francisco when new census numbers are released.
Egan said that while some tech workers left San Francisco, labor and population statistics suggest they are still present in the region and positioning themselves for an eventual return to offices.
“We're still far and away the place that has kind of attracted early-stage VC in volume,” Egan said. “If and when the tech industry reenters another period of startup fervor, I think we’re going to be very well positioned in the Bay Area.”
Although venture capital deals dipped in 2022, seed-stage investment set a new annual record with $21 billion invested across more than 7,200 deals in 2022, according to PitchBook research.
That could fuel yet another San Francisco comeback as hacker-heavy communities like “Cerebral Valley” crop up in the city.
“The reports of the death of San Francisco are greatly exaggerated,” said James Currier, founding partner of venture capital firm NFX. “We’ve seen some exodus, but it’s cyclical. In the past eight weeks, I’ve had six texts from friends saying they were moving back.”
Kevin Truong can be reached at [email protected]