In Sight: San Francisco’s Recovery

“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."  Winston Churchill

The city’s nascent recovery is hard to see from the ground.

Union Square’s block-scarring vacancies seem to be proliferating, once overflowing cable cars are half-empty and cops ring the square, their disquieting presence promising security, but recalling crime. Awash in “For Lease” signs, empty storefronts and unlit office buildings, the Financial District still had that eerie where-is-everybody feeling on a recent Monday afternoon. But the streets are now clean and the denizens of downtown—the office workers, shopkeepers and tourists—no longer appear concerned about their personal security. Like fog and night baseball, safety is once again a given.

It takes optimism to parse it in the data.

The rear-view mirror numbers are not encouraging. According to JLL, the city’s office vacancy rate sat at 35.4 percent as of August 1st (spitting distance of its all-time high). And if you net new signed leases against departed tenants, the office market has lost another 954,000 feet to vacancy so far this year. At 23 percent, Union Square’s retail vacancy rate is a new high-water mark that—sadly—feels understated when walking the district. Office buildings that once sold for $1100 a foot are now trading for under $300 a foot. These basement prices do, however, bode well for the city’s recovery. Quality office buildings selling for .30 cents on the dollar will allow their new landlords to offer great leasing deals.

It's easier to see the recovery in the residential market’s gathering momentum and in the mushrooming number of office tenants looking for space today. The city’s residential vacancy rate is now about 3.5 percent, half the national average. According to Oz Erickson, CEO of Emerald Fund, residential rents are up over 11 percent this year and within 95 percent of their 2019 levels. A street level anecdote: one landlord showed his duplex 30 times the day he listed it and rented it to—hold your croissant—a couple returning from Austin.

Newmark reports that new tenant office demand now stands at 8.2 million feet, its highest level in over five years. This is wonderful news, but a word of caution. Roughly a third of that demand is from AI companies. Startup investment community F6S counts more than 1,300 AI companies already in San Francisco. While it’s theoretically possible that most of these companies could survive, history suggests otherwise. (America had 275 car companies in 1910.) Also, a chunk of that new office space demand is predicated upon employers’ return-to-work mandates that, thus far at least, have been heroically resisted.

If downtown’s fate were dependent solely on AI and the dream—or nightmare—of a five-day work week, Churchill’s end of the beginning would feel about right.

Yet everyone interviewed for this essay was far more optimistic than that. Why? Two words: Daniel Lurie. The mayor is on fire. Apparently inexhaustible, he pops up constantly in every conceivable city venue sharing his vision of a revitalized city, comforting residents, assuring businesses, courting new tenants, directing his staff to get this or that fixed. His calm, but insistent can-do attitude is at last inspiring confidence in city hall. I asked a young cop on the Union Square beat what the Force thought of the mayor. “We love him” came the instant response. Posting more often than a teenage influencer, the mayor is an Instagram star, always cheerleading for the city, always touting its allure and accomplishments. He posted an Instagram interview a couple weeks ago with a Visa senior executive who reported that the company’s internal data shows credit card spending in San Francisco is up 10% year over year and climbing every month, hard proof that hotels are slowly filling, new conventions booking and tourists returning.

Perhaps unconsciously adopting Carlyle’s great man theory of history, those I interviewed credited much of the city’s budding renaissance to Daniel Lurie. An academic historian would likely have a different perspective. The scholastically acceptable view—that history is explained by economics, class struggles, social movements and culture—would instead credit the people of San Francisco themselves for turning out progressives and voting in both a moderate mayor and moderates on the Board of Supervisors. Moderates who, while mindful of individual liberty, know that society cannot prosper without both personal and financial safety.

Great man or simply, as one interviewee put, “the right guy at the right time,” Daniel Lurie’s astronomic approval rating of 73 percent appears richly deserved if not a trifle low. Thanks to him and the people of San Francisco, it feels like we’re several innings past the end of the beginning.