# Just how badly is downtown San Francisco doing?
**URL:** https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775
**Category:** In My Humble Opinion
**Created:** [May 30, 2023, 3:40pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775 "2023-05-30T15:40:24Z")
**Posts on this page:** 20
**Page:** 6
### Author:  [@snowthx](https://boards.straightdope.com/u/snowthx)
#### Post date: [September 24, 2023, 9:06pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/101 "2023-09-24T21:06:55Z")
Yeah, I think there are certain characteristics a building needs to be considered a candidate. However, there are also economics to consider - a developer needs to be able to come out ahead on their investment. We’re all thinking - look at all that space, someone should convert it to living space, for homeless people, and fill low-rent needs in the city. But the building owner and contractor look at the same space and want to make a profit. If all the building conversions are luxury/high-end, it wont do much to address our housing challenges. The solutions and economics need to be scalable - that may mean lowering the bar regarding standards like windows and square ft of living space, in suite washer and dryer, etc.
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### Author:  [@Odesio](https://boards.straightdope.com/u/Odesio)
#### Post date: [September 25, 2023, 1:56am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/102 "2023-09-25T01:56:02Z")
> [@snowthx](#):
>
> But the building owner and contractor look at the same space and want to make a profit. If all the building conversions are luxury/high-end, it wont do much to address our housing challenges.
Those owners are going to have to do something because it won’t be long before they’re slapped by a commercial real estate crash that might see their values drop by as much as 40%. Of course this will end up being all of our problems as banks find themselves in trouble because of lowered real estate prices.
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### Author:  [@snowthx](https://boards.straightdope.com/u/snowthx)
#### Post date: [September 25, 2023, 1:12pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/103 "2023-09-25T13:12:37Z")
I thought that, too. But from what I read, commercial rents remain stubbornly high, in spite of relatively high vacancy rates. Those owners may be thinking of awaiting the return of office work. Perhaps they can somehow wtite-off the unoccupied space to lessen their losses for a while. But I agree - those buildings cannot remain empty forever.
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### Author:  [@Hypno-Toad](https://boards.straightdope.com/u/Hypno-Toad)
#### Post date: [September 25, 2023, 1:37pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/104 "2023-09-25T13:37:40Z")
We had a thread on here once about how commercial landlords will let a place stay empty rather than reduce rents. I can’t remember why though.
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### Author:  [@Mighty\_Mouse](https://boards.straightdope.com/u/Mighty_Mouse)
#### Post date: [September 25, 2023, 1:48pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/105 "2023-09-25T13:48:22Z")
I’m the one who started the thread.
There were many reasons posited, some that I remember that made sense (I work in finance, but not real estate finance)
- accounting rules that only approximate reality. e.g. you can carry a building in the books at $10M if you believe you can rent it for $1M a year. But if you rent it for $500k/year, you’ve got to write it down to $5M and take a $5M loss right away. The fact that you actually rented it for $500k destroys your presumption that the fair market rent is $1M.
- it costs a significant amount to “fit up” the property. In the example above it may take $1M in customization to rent it for twenty years. You’d rather wait a year or two hoping the rent will recover to $1M per year, rather than locking in the lower $500k per year for twenty years.
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### Author:  [@Odesio](https://boards.straightdope.com/u/Odesio)
#### Post date: [September 25, 2023, 2:06pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/106 "2023-09-25T14:06:05Z")
> [@snowthx](#):
>
> I thought that, too. But from what I read, commercial rents remain stubbornly high, in spite of relatively high vacancy rates. Those owners may be thinking of awaiting the return of office work. Perhaps they can somehow wtite-off the unoccupied space to lessen their losses for a while. But I agree - those buildings cannot remain empty forever.
Not that I spend a lot of time looking for commercial real estate, but here in Little Rock rent remains remarkably stable even though we have more open space than we had in 2019. My company will move out of a building as soon as the lease is up and I can’t imagine the owner will have an easy time replacing us. But then I’ve always been a bit baffled because even before COVID it wasn’t uncommon to see some retail properties sit for years without tenants.
Edit: Thanks, Mighty Mouse. That makes sense.
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### Author:  [@LSLGuy](https://boards.straightdope.com/u/LSLGuy)
#### Post date: [September 25, 2023, 3:34pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/107 "2023-09-25T15:34:45Z")
Related to both @Mighty_Mouse’s excellent points is that residential leases tend to be for one year. So that’s what we think of when we see a retail vacancy.
But commercial leases are 5 to 10 to 20 years. For the landlord, locking in a low rent for 10 years may well cost more than leaving it empty for a year then locking in a higher rate for the next 9+1 years.
Add in some wishful thinking, and some hope of a massive government bailout, and the pressure to stand pat grows. And of course, paradoxically, the more downtown building owners hold off on reducing rents or redeveloping for lower-cost uses, the greater the odds of an eventual bailout become. Collectively they can paint the government into a must-bailout corner if they all show enough discipline.
They might be outstandingly selfish, but they’re not outstandingly stupid.
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### Author:  [@snowthx](https://boards.straightdope.com/u/snowthx)
#### Post date: [September 25, 2023, 4:22pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/108 "2023-09-25T16:22:27Z")
I wonder if there are any ways San Francisco can restructure things financially so that redevelopment of empty office space is less risky/more competitive with the “wait and see” approach. Empty office towers are not doing any good for the city, and may be a drain, so the city may be incentivised to find creative solutions for building owners to make it more economical to convert selected properties to residences.
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### Author:  [@suranyi](https://boards.straightdope.com/u/suranyi)
#### Post date: [September 25, 2023, 4:43pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/109 "2023-09-25T16:43:10Z")
A new program just started called [Vacant to Vibrant](https://abc7news.com/san-francisco-vacant-to-vibrant-program-17-pop-ups-shops-coming-sf-buildings-retail-spaces-financial-district/13696576/) where the city will pay the short term rent for a bunch of pop-up stores to fill some empty spaces.
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### Author:  [@Pork\_Rind](https://boards.straightdope.com/u/Pork_Rind)
#### Post date: [September 25, 2023, 4:49pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/110 "2023-09-25T16:49:05Z")
> [@Mighty\_Mouse](#):
>
> - accounting rules that only approximate reality. e.g. you can carry a building in the books at $10M if you believe you can rent it for $1M a year. But if you rent it for $500k/year, you’ve got to write it down to $5M and take a $5M loss right away. The fact that you actually rented it for $500k destroys your presumption that the fair market rent is $1M.
I don’t recall if I saw it in that thread, but a local real estate guy was explaining our local problems with empty retail storefronts. Similar to the write down example here, he said that there was also a problem with the loans. Commercial mortgages are (according to him) written based on an defined revenue stream of lease and rent payments. Even when the storefront is empty, as long as you are _trying_ to rent at the defined value, you are in compliance with the terms of the mortgage. If you discount your rent/lease rate to attract retailers, you then are no longer in compliance with the terms of the mortgage and thus bad things could happen, including having the whole thing come due at once.
This guy was a broker and seemed pretty knowledgable. He was explaining this
feature’ of commercial mortgages in the context of a discussed city vacancy tax, and how in his opinion that would just trigger a collapse in our city’s commercial properties values. I suspect if there are holes in this story, they are from my misunderstanding, but it will freely admit he could have been full of shit. Seems plausible though.
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### Author:  [@John\_Bredin](https://boards.straightdope.com/u/John_Bredin)
#### Post date: [September 26, 2023, 12:07am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/111 "2023-09-26T00:07:28Z")
It’s not San Francisco, but there was a Chicago Tribune article a while back about smaller firms and non-profits renting Loop office space they couldn’t have afforded pre-Covid. So some commercial landlords in at least one city _did_ lower rents. [Article](https://www.chicagotribune.com/business/ct-biz-nonprofits-real-estate-20230829-xhca5iqfuvcp3nhsf3hzrwn4ee-story.html)
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### Author:  [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)
#### Post date: [September 26, 2023, 12:34am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/112 "2023-09-26T00:34:23Z")
Downtown SF is going to take some serious hits when all that commercial real-estate comes up for refinancing. A lot of landlords are going to go from 0% loans and full buildings to 7% refinances for empty buildings. Some will just walk away and let the banks figure it out. There’s enough of that around the country that we risk another set of bank failures, but SF will likely be hardest hit.
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### Author:  [@Al128](https://boards.straightdope.com/u/Al128)
#### Post date: [September 26, 2023, 1:13am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/113 "2023-09-26T01:13:54Z")
> [@LSLGuy](#):
>
> But commercial leases are 5 to 10 to 20 years. For the landlord, locking in a low rent for 10 years may well cost more than leaving it empty for a year then locking in a higher rate for the next 9+1 years.
while I can completely see the point you are making … I also see bad news on the horizon for commercial R.E.
AI don’t need no fancy office in the city, and e-com are notorious for having their warehouses in suburbia… so on a strategic level, **I don’t see any chance for the tide turning for com.R.E. anytime to pre-2019 levels** (on a general level - there might be “hotspots” that will do well, but I’d be surprised if there weren’t some structural change in places like Manhattan, etc…).
also, even if you have 5, 10 or 20 years of lease - those will have some severence clause for both sides (probably a bit poison-pilled,) but better than paying 18 years of above-market rent … so there must be a way out for both parties to the contract.
I know a lot of companies are renegotiating their deals (i assume somewhat silently) and a good part is getting better conditions i hear… (not specific to the US, but I assume similar mechanics apply to the misc. R.E. markets around the world.
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### Author:  [@LSLGuy](https://boards.straightdope.com/u/LSLGuy)
#### Post date: [September 26, 2023, 1:19am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/114 "2023-09-26T01:19:57Z")
Oh yes, quite right. There is a day of reckoning coming. And worldwide as you say, although not necessarily all simultaneously.
This is another rickety house of cards built on a wobbly scaffolding off the edge of a ccrumbling cliff. Finance is ever thus. It’s all about selling the illusion of stability, pocketing the profits in a non-recourse form then walking away happy before the edifice of concentrated fakery and wishful thinking crumbles.
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### Author:  [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)
#### Post date: [September 26, 2023, 1:21am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/115 "2023-09-26T01:21:25Z")
> [@Al128](#):
>
> AI don’t need no fancy office in the city, and e-com are notorious for having their warehouses in suburbia… so on a strategic level, **I don’t see any chance for the tide turning for com.R.E. anytime to pre-2019 levels** (on a general level - there might be “hotspots” that will do well, but I’d be surprised if there weren’t some structural change in places like Manhattan, etc…).
I remember reading that several AI firms have taken big leases in downtown San Francisco.
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### Author:  [@Al128](https://boards.straightdope.com/u/Al128)
#### Post date: [September 26, 2023, 1:36am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/116 "2023-09-26T01:36:03Z")
they might - but that does not change the fact that a laaaarge part of low-to-middle-tier office workers will lose their jobs over the next 5-10 years … on a global scale probably millions or 10s of millions — who no longer need office space.
stuff like that:
> **[“AI took my job, literally”—Gizmodo fires Spanish staff amid switch to AI...](https://arstechnica.com/information-technology/2023/09/ai-took-my-job-literally-gizmodo-fires-spanish-staff-amid-switch-to-ai-translator/)**
>
> Meanwhile, readers say that some AI-penned articles switch languages halfway through.
In a way you are replacing 100 guys with shovels with 1 guy and a backhoe … (in an office setting)
so, its gonna be a huge net-negative for com.R.E. … how huge I don’t know - but I’d not invest in this line of business EVER!
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### Author:  [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)
#### Post date: [September 26, 2023, 1:36am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/117 "2023-09-26T01:36:51Z")
> [@Al128](#):
>
> they might - but that does not change the fact that a laaaarge part of low-to-middle-tier office workers will lose their jobs over the next 5-10 years … on a global scale probably millions or 10s of millions — who no longer need office space.
I’m skeptical about that. I don’t think the AI is that good yet.
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### Author:  [@Al128](https://boards.straightdope.com/u/Al128)
#### Post date: [September 26, 2023, 1:42am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/118 "2023-09-26T01:42:48Z")
the point is: it is not - until it is … (good enough, doesn’t have to be perfect)
and LLM moved from “useless-chat-bot” to “hey, its writing better than 90% of the people I know” in what? 18 months … and will get progressively better …
I’d rather not work in an ad-agency in 2023 as a texter or graphix designer …
my guess is the first call centers will switch (partially, tier-1) over next year or 2025 by the latest … and that alone are millions of people. Call Centers are notoriously high-maintainance from a HR/training pov … with incredibly high rotation / hiring/training/severence cycles
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### Author:  [@LSLGuy](https://boards.straightdope.com/u/LSLGuy)
#### Post date: [September 26, 2023, 2:01am UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/119 "2023-09-26T02:01:21Z")
> [@Dewey\_Finn](#):
>
> I’m skeptical about that. I don’t think the AI is that good yet.
It doesn’t have to be good to succeed.
The US software developer industry was gutted by the advent of offshore outifts mostly in India. They are purely human, virtually all useless and virtually all dangerously incompetent. But they deliver their incompetent results so much more cheaply than US workers can deliver OK-ish results that the pointy-haired bosses prefer cheap and all wrong over expensive and a little bit wrong.
Bottom line, as long as AI is more cheaper than it is wronger, it will defeat all comers. And it’s so many orders of magnitude cheaper right now that it can be orders of magnitude wronger and still score well on the PHB’s decision rubric.
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### Author:  [@ShadowFacts](https://boards.straightdope.com/u/ShadowFacts)
#### Post date: [September 26, 2023, 4:41pm UTC](https://boards.straightdope.com/t/just-how-badly-is-downtown-san-francisco-doing/984775/120 "2023-09-26T16:41:28Z")
> [@LSLGuy](#):
>
> Bottom line, as long as AI is more cheaper than it is wronger, it will defeat all comers.
Grammatically, this sentence gives me hives, but it is simultaneously very well put, which is an impressive achievement. I salute you.
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