Large metropolises will manage potential budget shortfalls how they will.

More importantly, after large commercial leases expire, commercial property owners and their management companies will adjust their commercial rents until companies and institutions find value. While some concerns go remote-only, others will implement hybrid or even full RTO. The price and associated tax revenue on these commercial leases will stabilize and, more than likely, increase as the economy increases.

The expiration of corporate leases will not usher municipal financial apocalypse as many observers seem to speculate. Rental market corrections unavoidably will lag pandemic economic contraction (leases take time to expire) and such contractions hardly signal the end of commercial and corporate interests in renting urban real estate.

But if they are looking to cut back on rent costs it makes me think times are tough. That paying attention to cutting this cost (and the hassle it will cause now and when things return to normal), and taking that attention away from growth means that there is an issue.

Obviously this isn't the permanent collapse of SF but it might be a nail in it's long term coffin. I can't imagine in 50 years time, with globalisation, with global currencies, remote working, VR etc. that you'd need to be tied to a physical location to innovate or get investment.

However, this will take years, if not a decade or two. The reason being that the real estate companies knows this is possible, and so is likely diversified, and therefore, can absorb the losses for a long time (as long as they have income elsewhere to make up for it), and hope for a reversal of demand for offices, or wait for organic growth to catch up.

They will not willingly bankrupt themselves and take a loss for no good reason - that's just stupid.

So in the mean time, the offices aren't being used efficiently. If the city is really keen on making good use of the space by making it residential, they can speed this process up by subsidizing.

I agree with you, and in particular I have a worry that corporate real estate is a bloodbath whose extent is not yet revealed. WFH has destroyed the need for knowledge workers to cluster in a downtown office and all CFOs must be wondering how they can get out of their leases as soon as they expire, not only to save some costs but also to keep workers who like WFH happy (played right between HR head, CEO, and CFO, it could be touted as a benefit to employees that also saves the company money)

SFO vacancy rates are about 15% right now (source: https://www.nar.realtor/blogs/economists-outlook/metro-offic...). NYC, 13%, double pre-COVID. See the link for the data source.

There will be many ways to read this data and if I knew which way the wind was blowing I'd obviously be out there making a killing on CBRE instead of typing this post, but if this trend stays, then cities will undergo huge shifts again. I don't predict the death of the city (cities have gone from being based on geographic confluence, to defensive importance, to transport hubs, to industrial centers, to mercantile centers, to confluences of knowledge workers, and they will adapt again) but it's goijng to be a bumpy ride.

There will be massive consequences for those holding commercial real estate if companies stop paying those insane rents. Also, cities will suffer (at least in the short-term) if property taxes drop from those properties losing value. They are definitely afraid of remote work and the changes it will bring.

That seems like it's going to have two major consequences - when the values on those buildings fall, SF is going to lose a lot if income at a time when the quality of life is already greatly suffering there. On top of that, a lot of those buildings have large loans against them that may well become greater than the value of the buildings. The latter certainly feels like the sort of thing that could ripple through the economy as building owners have to sell off assets to make loan payments.

“Here’s the big “why not” when it comes to office-to-housing conversions: Gutting a building and rebuilding the inside as housing is expensive, especially in San Francisco and especially while construction costs are high.

Asking rents for downtown commercial leases have dropped around 15% from pre-pandemic peaks, but haven’t dipped further because of the relatively long lease terms signed by commercial tenants, as well as market optimism that the return to office will continue at a gradual pace.

Essentially, the city and the market aren’t convinced that empty offices downtown are here to stay.

“People would need to believe that office uses are going away,” said Louis Cornejo, president and CEO of Urban Group Real Estate. “You talk to 10 people you get 10 different comments. Are we really going to take a chance on our economy based on: ‘Well, it worked for a year or two?’”

My guess is that it is not well-defined and therefore generates minimal revenue. I also can't tell if this applies to office buildings or is more for street level commercial real estate.

Yes, that is the hope - and the narrative - but we're not talking about a minor correction here ... like a 10% haircut on building values. I suspect the current market for office space in SF is probably ~40% off and that's for class-A space.

"... but unless rents fell off a cliff, has a bit of runway to play out."

Rents have fallen off a cliff we're just pretending they haven't by refusing to lease the space at the prices the market would actually clear at. Building owners and management, etc., would rather have empty offices than establish new, lower rents by actually renting them.

If they did actually rent the space at the market clearing price they would all get margin calls from their banks because their loan to value (LTV) ratios would blow up and their loans have covenants specifically calling out the LTV.

This cannot last forever.

Eventually someone is going to rent space at the market rates and building owners in SF will either need to show up at their bank with a 5 or 10 million dollar check ... or with the keys to turn in.

* Note: residential property taxation in NYC is in dire need of reform but the point still stands

How the communication flows from the government or RE developers to executives is beyond my understanding, but it looks like there is not much willingness to rethink how corporate office space can be used in other ways, and more willingness to just go back to the status quo.

> About 700 office leases are likely to expire in 2023 and another 600 are up in 2024 in the Financial District alone, said Avison Young’s insights and innovation head Dina Gouveia, for a total of about 10 million square feet of office space. In 2025 and 2026, another 10 million-plus square feet are likely to expire.

https://therealdeal.com/sanfrancisco/2022/10/17/downtown-sf-...

There are many smaller cities, and cities without as many issues as SanFran too. So with remote, there is also the choice of "better managed city".

I wonder if it will empty, or become some apocalyptic landscape, with endless abandoned empty office buildings, and the homeless living in them, and everyone else just gone.

It seems, from the comments here, that SanFran is very poorly run. The robberies, the homeless, the filth on the street, and now, emptiness and presumably maybe budget problems soon.

For example, what if some of the older office buildings are just cut+run? Property management corp X goes bankrupt, or, just decides that it's not worth paying property tax any more.

Sure, the city can seize and sell off property for back tax reclamation, but what if no one even wants to buy? What if eventually 1/2 the office space is just owned by the city, decaying, no property tax, unmaintained?

It could become Detroit, but worse.