Remote Work's Staying Power A 'Major Shock' To S.F. Government

Office usage has remained depressed in San Francisco for so long that city officials are trying to get a grasp on the severity of the problem and formulate a plan for how to manage the shifting landscape of the city's commercial activity going forward.

A new report from the city of San Francisco called The Persistence of Pandemic-Era Remote Work lays out familiar data about the return-to-work effort, or lack thereof, and signals a first step by the city to deal with the longer-term implications of the trend.

The report serves as a response to a letter of inquiry about the state of commercial real estate demand in the city from Supervisor Catherine Stefani.

In comments to the San Francisco Standard, city Chief Economist Ted Egan referred to the rigidness of remote work as a “major shock.”

“We wanted to make decision-makers know that we in the controller’s office are aware of this phenomenon,” Egan told the S.F. Standard. “We don’t think that everyone’s going to go back to work.”

The report highlights JLL’s longer-term office vacancy forecast for the city, which projects vacancy rates between 19.5% and 25.3% to persist into 2026.

“If vacancy rates remain at this elevated level, and a large share of these are direct vacancies, then the income, and market value, of office buildings in the city are likely to be negatively affected,” the report says.

The prospects for the future of office cap rates in the report are sobering, painting a potentially grim picture for the city’s property values should current trends continue.

“Additionally, since 2019, the spread between San Francisco office capitalization rates (as measured by the median rate of reported transactions), and 10-year [Treasuries] has widened, according to Moody’s Analytics," the report says. "If that spread persists until 2028, and the Blue Chip forecasts for the 10-year yield are accurate, San Francisco office capitalization rates will sit in the 7% - 8% range between now and 2028, instead of the 5% - 6% range that prevailed during most of the 2010s. The market value of office buildings would decline proportionately."

The report also says that the controller’s office is building a model to estimate the impact of decreased property tax revenue within the city and determining how far the market values of office buildings can dip before property tax revenue is adversely impacted.