San Francisco’s slow recovery from Covid is a struggle for small businesses – base

Marshall Luck massage and chiropractic practices in downtown San Francisco have survived the Covid-19 pandemic, thanks to the government’s stimulus fund and heavy debt. But more than two years after the shutdown swept the city, his business has returned to just 70% of its pre-pandemic level.

Like many small business neighbors, like those who managed to float, good luck was waiting for San Francisco to bounce back. He relies on technicians from large companies such as Google and Salesforce, which is difficult because they have the flexibility to meet office demands.

San Francisco is at another level as major cities across the country are struggling to fully recover from a pandemic, tech companies are breaking rental contracts, and residents are looking for a more affordable place. The Mayor of San Francisco’s office, London Breed, estimates that one-third of San Francisco’s workforce currently works in remote and suburban locations. Last year, it resulted in a tremendous $ 400 million reduction in tax revenues, according to the Comptroller’s office.

The center is finally showing life. Traffic on foot has increased, fewer stores have closed, and some closed restaurants and cafes have been replaced by new tenants. But the vast range of once vibrant trade remains dormant, and merchants like luck are plagued by a fog of uncertainty, hoping workers will eventually return. is.

“Most of our patient population is large, and when they come back, it helps us stay stable,” Luck told CNBC in an interview. “That’s what we’re clinging to: this recovery.”

Going deep into the battle is the reality that Covid never disappears. With the rise of BA.4 and BA.5 omicron subvariants, the United States reported an average of 126,000 cases per day this week, more than double the number at the end of April.

Bay Area commuters who use public transport still prefer to stay home. The average daily number of passengers in Bay Area Rapid Transit dropped from more than 400,000 in 2019 to less than 80,000 last year. By May, the number had approached 136,000 per weekday, according to the BART website.

“It’s still very much in our psyche because we’re still wearing masks in the office,” Luck said.

Traffic data reflects the status of real estate. According to a CBRE survey, office vacancy rates in San Francisco rose from 23.8% in the previous quarter to 24.2% in the second quarter. Other major cities are historically high, but still below San Francisco.

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

“We’re slower than New York and slower than Chicago, which is related to our high reliance on technology,” said Robert Summons, regional director of the Cushman & Wakefield research team in the northeast. ..

“Most employees want to do some work at home when they return to the office, and many employers offer it as an option,” Mayor Breed told CNBC in a recent interview. rice field.

Salesforce, San Francisco’s largest employer, said last week that it had shrunk its offices in the city again, listing 40% of the 43-story building opposite Salesforce’s main tower. Coinbase closed its San Francisco office last year, and Lyft postponed its return to the office until 2023 at the earliest. Most reopened companies have reopened with optional support.

Even Google, one of the most vocal tech companies when it comes to returning employees to the office, has turned back. Workers rejected the request because of the record profits the company generated last year. Management said it approved 85% of requests for relocation or permanent remote work.

High-tech companies with long-term leases are suffering as San Francisco’s commercial real estate averages 30% to 40% below pre-pandemic prices, according to market experts.

Flexport, a global logistics company with an office in the center of Market Street, which once housed 500 employees, couldn’t find a tenant to lease space for more than two years.

Bill Hansen, Global Real Estate Director at Flexport, said: .. State, he said in an interview.

Flexport founder and CEO Ryan Petersen previously told CNBC that no one would do this job. He added a sad-faced emoji to his post, saying, “The space is great. We just signed a big deal and the market was very soft thanks to Covid.” ..

In downtown Rincon Center, where Twilio is located, the food court has been largely demolished, with the exception of some long-time tenants. The Mediterranean restaurant Cafe Elena, opposite One Market Plaza, is the only vendor open. As with March 2020 and beyond, the other five remain off. One market includes Autodesk, Google offices on floors, and CNBC Studios in San Francisco.

“Everyone loses. How much problem is that,” said Colin Yascochi, head of CBRE’s Tech Insight Center.

There is another side to the San Francisco real estate industry. High-end space is experiencing record prices.

Last year, Salesforce launched the East Tower space that Yelp and Sephora sublease to the company. The terms have not been disclosed, but real estate experts say they were expensive deals. In May, the Sobrat organization paid $ 71 million for a building in San Francisco’s South of Market district, setting a record of more than $ 1,700 per square foot.

“Coffee is no longer the only thing,” said Summons of Cushman & Wakefield, knowing that employers must offer more incentives to bring workers back. They are now negotiating to prepare for such a future.

“We have some very big deals, big tech companies are using the market, and we realize that it’s more comfortable to return to the office part-time and we’ll need it in the future,” Summons said. Said. .. “These are the kind of companies that have the money to do this kind of thing.”

Analysts at Wells Fargo and others expect the downtown housing market to recover significantly in 2024 and 2025. However, there is no guarantee that the cities around San Francisco, East Bay and Silicon Valley will be fully restored.

Home prices are still at the highest levels in the country, interest rates are now rising, and mortgages above $ 1 million are even higher.

“With no affordable solution to the housing crisis in the region, local businesses will have a hard time convincing graduates to stay in the region,” a Welfergo analyst said in a report this month.

“Regaining the tech gold rush and persuading workers in other regions to move to the Bay Area will be an even bigger challenge,” analysts write. But “despite many companies expanding and relocating outside the region, the Bay Area still has the most comprehensive technology ecosystem in the world,” they said. ..

Mayor Breed, who recently proposed a $ 14 billion annual budget for fiscal year 2022-23, recognizes that the world of work has changed. It relies on San Francisco’s cultural and tourist attractions to help regenerate.

“Our concerts, our activities, our competitions, and many things people want to visit big cities, we also need to focus on,” he told CNBC. “Working in the office is just a adjustment to change.”

The market could face further headwinds as real estate contracts expire next year. According to experts, landlords are likely to be forced to offer better conditions to tenants who are considering moving out or at least shrinking.

Some SMEs have revenue sharing agreements with their owners to reduce start-up costs and spread risk. Some people are discussing sharing space with other tenants “in an unprecedented way,” Summons said.

Things don’t go well at Luck’s clinic. He had to miniaturize and rely on the loan he said “probably pay for the rest of his life.”

But good luck said he had seen a negative cycle before and hoped that history would repeat itself.

“I’ve experienced a dotcom meltdown and a housing bubble,” he said. “A recession will occur and eventually recover. Hopefully, within four to five years, there may be a more diverse business population.

– CNBC’s Yasmin Khorram contributed to this report

clock: One-on-one CNBC interview with San Francisco Mayor London Breed