California Spotlight

California Spotlight: From Boom to Doom in San Francisco

During the peak of the most recent tech upswing, downtown San Francisco was booming. Now, after the pandemic and a new round of tech layoffs, commentators fear that the so-called “doom loop” has come to valuable commercial real estate. While boom and bust cycles are not new to The City, what can we learn from the struggles of commercial real estate?

Recorded on October 31, 2023 at UC Berkley’s Social Science Matrix, this California Spotlight panel featured a discussion of the current state of commercial real estate in San Francisco — and what lies ahead.

Panelists include Nicholas Bloom, the William Eberle Professor of Economics at Stanford University; Ted Egan, Chief Economist of the City and County of San Francisco; and Nancy Wallace, the Lisle and Roslyn Payne Chair in Real Estate Capital Markets at Berkeley Haas. Amir Kermani, Associate Professor of Finance and Real Estate at the Haas School of Business and Research Associate at the National Bureau of Economic Research, moderated.

This panel was co-sponsored by Global Metropolitan Studies (GMS), Haas School of Business, the Berkeley Economy and Society Initiative (BESI), and the Fisher Center for Real Estate & Urban Economics. Learn more at

A transcript of the event is included below.

Listen to the panel as a podcast.

Paul Pierson: Even on Berkeley time, we’re ready to go now. I’m Paul Pierson, I’m the director of the Berkeley Economy and Society Initiative. And it’s my pleasure to welcome you to this panel– very appropriate for Halloween, From Boom to Doom in San Francisco. We have four distinguished guests to lead us here. And I just want to give a couple of preliminary notes, just mention here on the slides, I won’t run through all of these, but we’ll leave this up for a second for people to look at– look at upcoming events at the Social Science Matrix.

So we have a bunch of great events coming up here. OK, so I’d like to just begin by introducing Amir Kirmani, Associate Professor of Finance and Real Estate at the Haas School of Business, and a Research Associate at the National Bureau of Economic Research. Professor Kirmani is going to moderate this session, and he can also introduce our distinguished guests.

Amir Kermani: OK, so thank you so much for coming. So today, actually, I’m very pleased to discuss this very important topic on how San Francisco went from the hottest city in the US to almost a dubious one. So basically, in the decade before COVID, if we look at the data, San Francisco had the highest job growth rate, basically, in the US, with a growth rate of 3.8% annually. Since COVID, actually, San Francisco has had the highest decline in the population.

So population– I mean, we– I mean, San Francisco had lost more than 3% of its population. If we look at office vacancies, again, like, we went from the lowest in the country to the highest in the country. We went from 4% to 30%. If we look at office space prices, we are seeing something, 60% to 80% discount compared to the latest assessments that these properties had. And unfortunately, if we look at some statistics related to safety and security, those also don’t look that good.

So if, for example, we look at the car thefts, that’s 40% more than what it was in 2019. So I think– I mean, the main question today for everyone is how San Francisco is going to look like going forward. And in particular, like, I mean, can we do something about it to make it a better place? So– and for that question, I couldn’t think of any better group of people than basically the group that we have today.

So today, we will start with Ted. Ted Egan is the chief economist of the City and County of San Francisco, and directs the Office of Economic Analysis in the city comptroller office. Basically, that office prepares independent economic analysis. Since he joined the office in 2007, they published over 100 economic impact reports on policy issues like minimum wage, affordable housing, business taxes, land use planning, sporting events, and short term rentals.

During this time, Ted served as the expert witness on the economics of same sex marriage and he won a good governance award for his work redesigning the city’s business tax. And in general, like, basically, if you are looking for someone who knows the best, every detail of what’s happening in San Francisco, with the numbers– I mean, Ted is that person. Then, after that, we will have Nick. Nick, I know him since almost the first year of my graduate school. I think he was always, like, the source of admiration for all of us as a graduate student.

So Nick is the William Eberle Professor of Economics at Stanford. His research focused on working from home, management practices, and uncertainty. He previously worked at the UK Treasury and McKinsey & Company, and the IFS. He has a BA from Cambridge, MPhil from Oxford, and he got his PhD from UCL. He’s a fellow of the American Academy of Arts and Science, the recipient of Guggenheim and Sloan Fellowship, and Frisch Medal, and a NSF Career Award.

He was elected also as the Bloomberg 50 for his advice on working from home. I was telling to Nick that I think the difference between Nick and other great economists is that a lot of us are working on good topics, and Nick defines what is a good topic. So I remember when I was a grad student, he defined uncertainty as a very hot topic of research. Then, it was very much about management. And now, like, I think since COVID, he has been the main driving force behind research on working from home.

And then, finally, we will have Nancy Wallace. I mean, Nancy is the Lisle and Roslyn Payne Chair in the Real Estate Capital Market at Berkeley Haas. She serves as the chair of the Real Estate group, which means that she is my boss, and co-chair of the Fisher Center for Real Estate and Urban Economics. That also means that my research money comes from her. So– and I mean, Nancy, is the expert, basically, on mortgage, mortgage related securities, and other real estate topics.

Again, like, I think– I mean, if you’re looking about solutions and how we can fix the issues, I can hardly think of anyone who knows more details about all of things that are not only happening within the city, but also, like, in the US, and what are the tax rules that– basically, I mean, we should take advantage of those. I think Nancy is the expert on all of those topics. So I’m very pleased to have this group today.

So we will start with Ted. And so Ted, thank you.

Ted Egan: Good afternoon, everyone. I’ve been nominated to speak first, but one of the things I should say is everything I say kind of depends on what Nick will say, so– I’m the, as Amir mentioned, I’m the city’s chief economist. And I’ve had a lot of inquiries from the press and from others this year about what’s going on in San Francisco. And especially, the word “doom” is appearing a lot in these kinds of questions.

And so my slides are basically going to be– or my talk is basically going to be about this question of, is San Francisco in a doom loop? I think the doom, per se, is sort of a given. But the loop question is, I think, an interesting question. So I’m going to mainly focus on that. As I say, I’m going to be relying on stuff Nick hasn’t said yet. But basically, the starting point I think for understanding where San Francisco is, I think, is that remote work, this phenomenon that’s persisted since the pandemic, is affecting office demand, reducing office demand.

San Francisco is an office center. More than 75% of the city’s GDP comes from the office industries here that I’ve highlighted in a shade of red– professional services, information, finance, government, et cetera. Everything else– tourism, health, retail, is less than 25% of the city’s economy. So when something big happens to the office sector, like people are coming into the office 43% of normal, that’s going to have ripple effects on the entire city’s economy.

And the real question is, what becomes of the city’s economy? How does it adjust to that shock? It’s clear that the San Francisco office market is facing a giant adjustment. It’s in the process of resetting now. This is data from JLL on the change in office vacancy rates across major markets since 2019. They’ve gone up everywhere. I think that’s the first thing I say to people. It’s like, I hear San Francisco has a bad office market. Well, the office market is bad everywhere.

But yes, it is true. San Francisco has gone from the hottest office market, where the vacancy rate was 6% four years ago, and now, it’s one of the coldest, if not the coldest, at more than 30% vacancy. That is a lot of companies giving up their space. And as I mentioned, even the people who have leases are not coming into the office. And so this is a process that is still underway. We are– as Amir mentioned, we’re seeing office buildings sell for 60, 70, 75% below what they were sold at before the pandemic.

And so that’s bad for the office sector. On the other hand, no, San Francisco is not the fastest growing job center in the country anymore. But its jobs have been recovering. Until the middle of last year, when high interest rates put a crimp in the tech sector, the city had pretty healthy employment growth coming out of COVID. City’s unemployment rate is a little below 4%, which is one of the lowest rates in California. The labor market of the city isn’t showing the kind of crisis that you would see in a city that is classically going into a downward spiral.

We did lose a lot of population in 2020 to 2021. The population loss slowed a lot the following year, so we’re also not seeing a kind of accelerating loss of population. But I do think there’s a real question about what happens to the city’s economy, given what’s happening to offices. So for offices, there’s doom. And again, the interesting question is, is there a doom loop? And one of the reasons it’s an interesting question is just the way urban economies work.

There’s so many– what economists call externalities in cities, so many shocks affect other things in ways that can make bad situations worse, or good situations better. And these aggravating factors affecting a place like San Francisco are, like, what happens to the talent pool, the base of skilled workers in San Francisco area, the Bay Area, that’s driven all of this economic growth for the past 15 years, certainly in San Francisco.

Do they move away? And if they move away, is there less reason to stay there? Is there less reason to– if venture capital goes away, is there less reason to start a company in San Francisco? And therefore, is there less venture capital? All of these critical mass effects can start to unwind in ways that could be potentially risky for the city’s economy, the region’s economy, as a result of reduced office attendance.

Downtown businesses have seen a significant shock because of remote work. When there’s less things to do downtown, either from a business supply point of view, or workers looking for things to do at lunchtime or after work, that makes downtown less attractive. And if downtown is less attractive, there are even less people coming to downtown, and even more reasons for business to close. So that’s another way things can unwind.

The most common route that people say to me as why you must be in a doom loop is because we’ve heard you’ve lost tax revenue because of remote work. And so surely, that means you’ll have to cut vital services. That will make people move out of San Francisco. Maybe, that’s a possibility. And that’s certainly true for transit as well. The transit ridership to San Francisco is a fraction of what it was before, and those agencies are looking at fiscal cliffs.

But there are also potential compensatory factors, or equilibrating factors, if you like, things that make San Francisco more attractive as a result of the negative shock, one of which is office rents, which are cheaper, and are about to get much cheaper, as some of these buildings that are selling at a huge discount reposition in the market. Housing costs have gotten cheaper and are going to likely continue to get cheaper, so San Francisco’s more affordable.

Transportation congestion is a maybe. It’s a funny story. But certainly, there are less people commuting to downtown. So the real question for me about a doom loop is, which of these factors outweighs? Is it the aggravating factors that make everything worse in response to shock? Or is it the compensating factors that say, you know what? It’s just cheaper now. And so now’s the time to make that investment, or come in there.

So let me speak from a data point of view on some of these questions. Amir mentioned, and it’s sort of well known now, that San Francisco and the Bay Area as a whole had a big population loss in the COVID years. And people are quick to say, oh, yeah, I heard that was all due because of remote work. And everybody moved to Lake Tahoe. But when you look at the actual industry of people who live in the San Francisco metro area and how that changed from 2019 to the latest census data we have, I’ve ranked here by the change during that time.

Industries like information professional services, the number of people who work in the information sector, who live in the San Francisco metro, has actually increased. That’s mostly tech. Professional, scientific, and technical services, sort of the other half of information technology, that talent pool hasn’t really budged. Where we lost people is low wage workers, so accommodation and food services, like, 30% of those workers are not in the Bay Area by 2022.

And administrative services, and arts, and wholesale trade, and retail trade– so it’s the low wage workforce that really contributed to the loss in the metro area. The city is a little bit of a different story. But in terms of the labor pool that a downtown office would draw from, it didn’t really dissipate. At least, that hasn’t happened yet. Downtown offices have shrunk. The base of businesses in downtown have shrunk. This is a chart showing the number of businesses that pay sales tax in San Francisco.

And the blue line is downtown sales, downtown zip codes, and the yellow line is the rest of the city. Downtown is kind of flat for the past couple of years. And you could say, wow, that’s a really slow recovery, or it’s not a recovery at all. And I think that’s fair. It isn’t also a downward spiral of businesses fleeing as offices empty, so it is very stable. I would describe it, when I look at the sales data, as a slow recovery. It’s also a fairly slow recovery across the city as a whole.

There isn’t a ton of economic dynamism in the city right now. But again, it isn’t a classic downward spiral. The city finances issue is a real issue. The sale of office buildings at steep discounts is going to translate into property tax loss for the city. We’re also forecasting property tax loss because houses are going to be trading at below where they were before. We’ve estimated that remote work, because businesses owe less business tax to the city when their workers are working from home, outside of the city, we estimate that cost us nearly half a billion dollars in 2021.

So that’s a lot of money for even a local government like San Francisco. And all of that is translating into accumulating fiscal stresses, I would say. The flat line here is our revenues that we’re forecasting for the next five years, and the sort of consistently growing line is our planned costs. So we’re looking, by ’27, ’28, at a $1.2 billion sort of working deficit. These aren’t committed city expenditures, but these are expenditures that the city would plan with normal escalation rates. And it’s going to require budgetary changes.

It’s going to require difficult budget choices. A bit of context about this, though, is the city’s overall tax revenue has doubled per capita in the last 20 years. So the city has a lot of money to work with. And this budget, in the context of the city’s $16 billion budget, is not insurmountable. It’s not the kind of thing we haven’t faced before. It is difficult decisions. I don’t think they’re impossible decisions.

And so it certainly doesn’t seem inevitable to me that the city is going to have to cut the kinds of services that are going to make people say, I just don’t like San Francisco anymore, and that’s why I’m leaving. And then lastly, let me turn to the biggest, I think, compensatory factor that will be good news for San Francisco as it adjusts to this. And that’s housing prices. San Francisco housing was about 400%– these are condo prices– about 400% of the US average until about the middle of last decade, when we had a few years of craziness and they got almost six times the US average.

That’s all gone. It’s now below 400% of the US average, dropping pretty consistently during the pandemic, after the pandemic, isn’t done dropping, and will probably drop until there is a real sign of economic dynamism again. A major question for the city is who’s tempted to move to San Francisco as housing gets cheaper. It’s a similar question you could ask on the office market side, who’s tempted to San Francisco office space as rents come down?

And these are big unknowns. But I do think this is a major piece of economic good news for San Francisco’s recovery. And it is cheaper, even as it is– there’s other factors that are being aggravated. So I guess my conclusion is the San Francisco doom loop is a risk. It’s a real risk. It’s worth looking at. But it isn’t the reality today. The labor market is good, generally. We’re seeing weakness now, but that’s for cyclical reasons and interest rates, and what’s going on in tech. There’s no reason to think that that’s permanent.

There aren’t any, really, economic indicators that are trending down over multiple years in a way that’s typical of a downward spiral. These risks I’ve talked about are real risks. We’re going to keep watching them. And I think for the long run, once– if we can see to an office market adjustment and a reduced vacancy, there are reasons to think that hybrid work may be good for high productivity, high wage job centers like the Bay Area. And one of the reasons for that is we’re able to have people from a much wider area work at least some of the time in San Francisco.

Cities– the biggest things that were holding back the growth of the city’s economy before the pandemic were housing, because you needed to be near downtown San Francisco, office space, because it was supply constrained, and transportation. But now every time you hire a hybrid worker, they don’t need to be nearby. They don’t need as much office space. And they don’t put as much load on the infrastructure for transportation every day that they work.

So remote work, in some ways, may wind up solving the biggest planning challenges that the Bay Area has always had, which is not enough infrastructure. So on that potentially hopeful note, I will pass it on.

Amir Kermani: OK, now it’s time to have Nick. And there will be a quiz at the end of Nick’s comments about, like, golf during the week, how many percent that has increased.

Nicholas Bloom: I see, great. So thanks, Ted. Fantastic to see that. Oh, I’m a bit loud. I’m going to talk about the future of work from home and then link it up to San Francisco. So I noticed on the way up, you talked about three sections. I removed one, which is on managing work from home, which I’m happy to share on slides at the end. But I’m just going to talk about current stats on work from home and then three impacts on the economy.

So where are? I actually posted out on LinkedIn this morning– like, you know, a Halloween treat, I guess if you like work from home. It looks like it’s stabilized. So there’s two different figures here. I’ll talk through the bigger one and then briefly mention the smaller one. So the bigger one on the left here, this is the share of days that people work from home in the US for a US workforce aged 20 to 64. Why do we look at share of data? Because work from home, turns out, is not binary, as Ted mentioned. A lot of people are doing hybrid, so we’re going to do day by day.

You can see that early in the pandemic is about 60%, so most people are fully remote if you go to kind of March, April, May 2020. It’s then dropped down, and since, really, the beginning of 2023, has just been flat. So the blue line is our line. We serve about 10,000 Americans a month. The red is the census. They serve about 40,000. They are both flat for 2023 onwards. So I know the media is full of stories– like, apparently, Zoom is calling everyone back in the office. But it’s just– they’re occasional stories. If you just look at the big data, that’s just not True.

On average, it’s flat. In the top right, you can actually see just the swipe card data from Kastle Security. So Kastle offers security for a bunch of offices– you know, hundreds of them around the country. They know how many people swipe in every day. That has been completely flat for this year. In fact, the data that came out this morning showed that last week was down versus the week before. So it’s of like the weather. It’s just fluctuating around, but there’s no net trend. Do you have a question– yeah, per person.

So percentage of– so if it’s 30%, it means 30% of people on any given day are working from home, 70% are on premises. Sorry, it’s days, just because– in fact, it’s said to be on any given day, there are 160 million working Americans, roughly. So if 30% of days are work from home, I should do my maths, it’s something like 45, 48 million something Americans are working from home on any random day. Turns out it’s not totally random. There are more of them working from home on Friday and Monday.

But across the week, that’s where we’re coming from. The way we get the data is we survey, as does the census. We both– we have a survey that’s random through the month, and we ask last week, what was your status on Monday, Tuesday, Wednesday, Thursday, Friday, Saturday, Sunday? Were you working, if so home, on business premises, et cetera, or traveling? So fact one, it looks like it’s stabilized. So coming back to Ted, I’m very aligned. It’s not declining downwards. This is national data, but San Francisco looks similar.

One of those lines in San Francisco, there’s not a downward drop, but there is a flat line in terms of the return to office has stalled out. Second point, related to this, it turns out there’s three groups. So the biggest group is actually people that are fully on site, so think of Stanford or Berkeley. I mean, for Stanford, probably same as Berkeley, about half of employees have to come in every day. They’re the people that bring the food, clean, security, transport, retail, manufacturing.

If you teach my kids, you know, schoolteachers come in every day. There’s hybrid, which is most of our students, MBAs, most people– probably, graduates in our world are typically coming in– I mean the vanilla version here is, come in the office. Like, she’s doing, say, Thursday, work from home, Monday, Friday. And then there’s about 10% that are fully remote. They tend to be more– they’re somewhat high end coders, like Airbnb or Atlassian. There’s a lot of people that sit here, like, IT support, payroll, HR.

So this is the highest paid group. These are our world of our students and Stanford students. This is the middle pay group. Fully on site turns out to be the lowest paid group. It looks like it’s permanent. This graph, I think, is the most amazing figure in many ways, rather than the one on the right. So the one on the left is the share of online retail expenditure. So on a log scale– so the straight line is constant growth rate, and it was growing very constantly from 2010 up to the beginning of the pandemic.

So this is not surprising at all. This is like Amazon, Instacart, and eBay, et cetera, et cetera. During the pandemic, hardly surprising, it jumps up a lot. Everyone ships– like, our household, we were buying from Safeway online and from Instacart, et cetera. The amazing thing is it drops back down. It’s totally back to trend. It’s, like, amazing. If you’re an alien and you had– you missed three years and landed, you just think, well, nothing’s happened. You just took out the pandemic, it’s completely back to trend.

And it’s not just this. If you look at things like open tables, eating out data, airline data, NFL attendance data, concert data, all of this is totally back to trend. So much of the economy has completely returned. The thing that hasn’t is work from home and anything that’s upstream and downstream. So I really think this is permanent. I mean, at this point, maybe it’s obvious, I still occasionally come across people who say when we return fully to the office– I’m like, that’s just not happening.

Not– maybe you might have thought that in 2020, but not by now. And on Ted’s point, you know– and I’ve seen Nancy’s slides, they’re fantastic as well. We were just talking about this earlier. There’s very– connected up. Ted showed the three biggest industries for San Francisco, collectively 56%, turn out to be the top three here. San Francisco is like ground zero for work from home. This is work from home levels by industry. Look at the bottom– hospitality, transport, retail, trade, very low levels.

Even managers often, when I speak to them, will say, you know, I talked to someone that ran a construction company. And he was saying, you know, I’ve got to come in every day, pretty much, because the front line people do. So I can’t work from home. I may do Fridays. At the top is information, which is tech, finance, and professional business services. San Francisco, over half of its employees are in the top three, so it’s just– it’s industry skew is very skewed towards work from home makeup.

So why is this here? There are four reasons, I’m going to skip three and four and just focus just on one and one, just to kind of benchmark why it’s permanent. The reason this is permanent is it’s profitable for businesses. So businesses make money from hybrid. Because of that, it’s going to stay. It’s going to be permanent. We’re in a capitalist economy, and anything that’s profitable tends to stick around. So by far the biggest thing is one. And the thing that CEOs complain about is two.

And I’m just going to go through these– so one, unhappiness, hybrid is really driven by recruitment and retention. So there’s two ways to look at it. One is we’ve surveyed by now tens of thousands of people in the US, and actually globally. And you get the same number over and over again. People value the ability to work from home two, three days a week as about the same as a 5% to 10% pay increase. So I don’t really think that’s a lot, but it’s a material amount of money.

When you talk to firms, if you want to haul everyone back five days a week, you’ve got to think in your mind of paying them 5% to 10% more. And like, why would you do that? You’d only do that if it improved productivity. In a minute, I’ll show you it just doesn’t seem to do much at all. So this is driving everything. Here’s just one concrete data point. It’s a randomized, controlled trial we did with, which is a big travel agent. They’re one of the big three, along with Priceline and Booking– sorry, the Expedia and

And they took 1,600 employees who are all grads, a third of them are post grads, and they randomized them into either five days in the office or working from home Wednesday, Friday. They did it by even or odd birthday. So if you have an even birthday, you come in five days a week. You have an odd birthday, you got to work from home on Wednesday, Friday. They ran this for six months.

What did they find? They found nothing on performance. Like, absolutely nothing, the point estimates were positive for working from home, hybrid, but it was very insignificant. They looked at lines of code written, performance reviews, promotions, assessments. They just couldn’t find anything. And then the one thing they did find is quit rate, so people that are allowed to work from home two days a week, they had a 35% lower quit rate. And so the c-suite looked at this and were, like, what’s not to link? There’s just no downside.

It’s really expensive. It costs, they reckon, $15,000 every time somebody quits, because you’ve got to hire them and train them. There’s no downside. There’s only upsides, so they just rolled it out. So this kind of explains why hybrids dominated. Then, the big critique you hear from execs, sometimes Jamie Dimon’s of this world, others, say, look, it’s really bad for productivity– Elon Musk. What’s the evidence? The evidence is– first, it’s really important to think about hybrid versus fully remote.

And they’re right. There’s a bunch of studies on hybrid. They basically find zero. So why might that be? Well, you kind of initially think, well, surely, people are working from home two days a week, that’s– maybe you think that’s bad. Like, I don’t know. They’re not being monitored, or they’re asleep, or whatever people worry about. On the other hand, it turns out, A, if you work from home, you save about 70 minutes a day from less commute. About 40% of that, people spend on more work. They’re less tired.

So A, you get a productivity benefit from avoiding commute. And B, it’s actually a lot quieter at home on average. So if you survey employees, they’ll say it’s quieter. There’s psychology evidence on, like, bursting, et cetera, suggests it’s best to be creative and productive, have a mix of in-person time and quiet time. So it looks like over a week, it’s kind of helpful, actually, to have a couple of quiet days. So hybrid is about flat. Fully remote is an enormous mix. There’s some very famous headline studies that found, like, -20% effects. Others have found plus 13%.

It’s all over the place. How can this be? From looking at a lot of this data, the big driver is basically how it’s managed. So there are a bunch of studies that look at people thrown home at the beginning of the pandemic, and like, lo and behold, their productivity plummets because there’s no management. It’s chaotic. They don’t have equipment. And so these studies say work from home is negative, which it is, I think, if you don’t have proper management control systems.

Some of the other studies look at very well organized setups, where people may be meeting retreats once a month for a day. They have performance review systems and proper training. And in that case, it looks like productivity, you can get to flat or even positive. So that kind of conclusion– you can imagine, if you’re setting this up, there’s a bunch of upsides. There’s no obvious downside. Therefore, for firms, that’s profitable. And that’s why it’s stuck.

So what are three impacts? One is the donut effect. So a lot of people have left city centers. So we have data from the United States Postal Service, change of address data, that– you can get it. It’s free on their website. It’s really great data. It’s by zip code by month, net flow. And here’s New York on the left. To echo Ted’s points, it’s not just San Francisco that’s been particularly hit. We looked at the 12 largest cities in the US. And collectively, they’ve lost almost a million people. They lost them mostly in 2020. They don’t seem to be coming back.

So if you look at the flows, there’s a huge rush out in 2020. And then, they went back to zero. It’s not that they’re– I kind of thought they’d leave out and then they’d come back again. It would net out. They’ve left and just haven’t come back. Where are they going? They’re actually mostly going to the suburbs of the same places. So we actually have a different data set. We track individuals. You see that over 60% are going to the suburbs of the same cities.

So if you take San Francisco, you can see here, a lot of people left– this is downtown San Francisco. This is Oakland. You see big losses of population. They’re actually going out to East Bay, South Bay, North Bay. Come back to Ted’s comment, if you’re working in the city two days a week, you don’t want to leave– mostly, people are not going to tar. They’re just going somewhere it’s cheaper. You can get a yard, maybe a home office. You only need to come in two days a week. You’ll put up with an hour and a half.

In some ways, this is fantastic. So there’s a lot of empty space here. If anyone that’s flown over, taken a flight, and looked out the window over Central Valley, it’s mostly farmland. There’s a lot of space that’s within two hours commute. If you’re only coming in a day or two a week, you can live there. And that is an enormous improvement on the cost of housing. Another thing we see is– again, exactly as Ted said, it’s actually cut the cost of living in city centers in real terms.

So this is Zillow data. If you look at the chain, this is rents on the left. This is home values on the right. For the top 12 cities, here’s the city center, kind of the higher density, the suburbs and exurbs, which are outer suburbs, typically one to two hours away. If you look, city center rents have gone up by about 13% since just before the beginning of the pandemic. So it seems like they’ve increased. But inflation is 17%. So in real terms, they’re actually cheaper. Rents are, actually, in real terms, down.

Home values are down a lot. If you look at home values in city centers, they’re down about 20% in real terms. San Francisco is maybe 30%. So if you bought a condo in Central San Francisco, it’s probably worth about 30% less in real terms than it was. So that’s an enormous drop in value, but it also means it’s cheaper to live here. The other thing we had is we have data from Mastercard, just from spending data. And again, a donut effect.

So here– it’s a bit sensitive showing overall levels, because Mastercard don’t want to reveal its over network spending, but they show differences in the center versus the various rings. What this basically shows is– this is 5 miles out from the center all the way up to 50 miles out. You can see the center has dropped massively versus 50 miles out. Expenditures shifted from city centers out to the suburbs. The suburbs are booming. The money, this tax revenue and spending has not disappeared. The aggregate economy is doing well.

It’s just not in the city center. It’s gone out to the suburbs. So one is there’s a donut effect. Two is– the thing that worries me most, in some ways, is as Ted said, is on transit. So people drive less. That’s great. That’s all good news. On the right, they’re also taking less public transit. Nationally, it’s down 30%. That’s bus and rail. Bus has dropped far less, because the people that tend to use buses tend to be frontline workers. They’re mostly back. The people that use trains tend to be more professionals, that basically are not back.

The numbers I’ve seen from San Francisco are more like 40% to 45% drop in train usership. The big issue is our budgets for the public transit are not set up to deal with this. So far, it’s been bailed out by the federal government. I just don’t know what happens in ’25, ’26. My kids actually take Caltrain. I mean, it’s pretty scary. I don’t know where this is heading. I don’t really have an answer.

And then finally, to end on a positive note, golf– so I don’t actually play golf, but I heard this so many times, that people complain about golf courses. So with a student, we got data on GPS data from a company called INRIX. They have about 100 million journeys a day. It’s really easy to figure out if somebody playing golf because they drive to a golf course and stay there for between two to six hours. You’re not living there and you’re not– you might have a very long lunch. But it’s a pretty good indicator.

And you notice in 2019, it was low in the week and peaked on the weekends. In 2022, it’s basically flat, at close to peak capacity throughout the week. This is the daily data, 2019, it was mostly in the morning, then people went off to work. I don’t know how. That’s like nine– I mean, I don’t know how they got away with starting work at 10, but anyway, they did. Here is 2022. The only reason it drops in the afternoon is this is national data. In the South, it’s just too hot. You just can’t play in the middle of the afternoon.

So basically, golf is dramatically up. The reason I put this up, connect to the next slide in a minute– I’ll conclude– is one of the things we’ve seen is because of work from home, there’s been a swiveling of time use. During the day, people are doing more leisure. I don’t think this is a bad thing, to be honest. So if Nancy is my boss and said, you got to get your job done. And decide I’m into golf and go play golf for a couple of hours, and work in the evenings, there’s nothing wrong with that– or go to the dentist, or put my kids up.

What it points to is the leisure economy, so shopping malls, gyms, you know, pickleball, whatever people want to do, that stuff– skiing– that stuff has actually seen a boom in demand because you can use the capacity better. So my guess is ski resorts have done really well, because now people can go ski Monday to Friday, rather than all crammed on the weekend.

Whereas this heading– I wrote something in The Economist. I think it’s pretty clearly, like, a Nike swoosh. It dropped from 2020 to ’22. It’s been flat. In the long run, technology is going to drive it up. We know in the very long run, what drives the remote work is technology. So think of laptops. Now, I’m one of four kids. Both my parents worked. When I grew up in the ’80s, my parents would occasionally work from home. Back then, there were no– not even personal computers. So it was, like, carrying a piece of paper. It was terrible.

So in the long run, this is slowly trending upwards. So I would conclude– is work from home is here to stay. It is not– it’s flat. It’s been flat now for about a year. It’s going to gradually edge up. I’m in line with Ted. I don’t think San Francisco– you know, it’s stable. I mean, it had a big negative shock. I don’t think it’s in a doom loop. I think it’s down, but it’s definitely not out. I think for me, the key is cities are rotated a bit more towards consumption activity, leisure, and a bit of away from offices.

I mean, there’s– offices are still here, but they’re less office dependent. They’re less retail. They’re more leisure, eating out. And also, people living in them– actually, some of that office space will convert. OK, I’ll stop and hand over to Nancy.

Amir Kermani: I think it’s very good to have Nancy as the last speaker, because you will see a lot of solutions as well.

Nancy Wallace: OK, great. So thank you for having me talk. I’m going to talk about, how do we think about the doom predictions for the Bay Area? And some of my slides are slightly less gloom and doom-y, and then thinking about how– what we do about, what we know, what Nick’s told us, what we’ve heard about the city budgets, all of this information? What do we do about it? What kind of thinking forward in terms of investments, in terms of responses?

So that’s how I’ve set my talk up. And obviously, we were, pre-pandemic, a start up culture. And we still are. So these are the very recent data, 2023 data, looking at the start up dollars per capita in the Bay Area. And as you can see, San Jose and San Francisco continue to dominate the United States. So relative to any other city’s per capita, expenditures in venture is high, and very early start up dollars, which is the other graph to your right, are also very high.

And again, compare– the only other sort of in the running city is Boston. And this relative has been true for a very long time. The Bay Area has been the site. These dollars are very substantial. And they have been maintained. So that seems very good news, sort of a counter to the doom loop. And then other significant employment that we’re now seeing have new types of payoffs that were perhaps unanticipated. We are still preeminent in semiconductors, both innovation and creating them.

And manufacturer– the fabs are coming back to the United States. There’s going to be a lot of repositioning of this manufacturing equipment here. So California still has 23% of that employment. And again, these are just brand new, 2023 data. AI venture capital, even in the last 18 months, it’s now $45.5 billion. And it’s hard to see this graph, but this is a map that I harvested from the Chronicle. And a lot of these are located in downtown San Francisco, in older buildings.

So one of the biggest ones is a $15 billion start up. It’s a Cruise facility. And then there’s a second one, again, another second round funding, $11.8 billion. You can’t see it on the map, it didn’t project well. But they’re right in downtown San Francisco. So again, we’re seeing these startups in buildings that are getting more fragile, similar to what we saw in the dot-com, where suddenly our brick buildings, where the windows open, became sites that people sought after.

Now, they’re looking for sites that are cheaper. And it is now a market that accommodates that. So the employment growth since the pandemic is now mostly positive. As you can see, I’m anchoring this on the pandemic. And these numbers are small. But nevertheless, they’re mostly positive. Everything is above the zero line. And so that’s a good news story. And then the other issue is, like, in what are we seeing the growth? And we’re seeing it in education, and health care and health services.

That includes things like pharma, all that flat line– pharmaceuticals in Berkeley, the South San Francisco activity that’s very dynamic, and then also education. So those are growth areas that are important to our economy in terms of building for the future. The other really interesting statistic, which, given where we are and who’s in this room very likely will not be surprising, but when you look at the educational attainment levels, again, the Bay Area is remarkably resilient.

49% of our over 25’s seconds have bachelor’s degrees at a minimum. And these show the overall attainment. And when higher than bachelor’s– so these are census data– of 59.4 bachelor’s, master’s, and PhDs. So those are very, very strong numbers. And again, they dominate any other urban area in the United States, with the exception of Boston. We’re always sort of close to or tied with Boston.

And then looking at the breakdown of higher education, again, it’s bachelor’s, master’s, PhDs, associate degrees. The amount of human capital that exists in this agglomeration is very impressive. And San Francisco is still ground zero on these facts. And this is just San Francisco. So these are pretty impressive. If we expanded it to the East Bay and the South Bay, we’ll have to make a concession to Stanford, we are– statistics change very little.

So it’s pretty much the same everywhere in the Bay Area. It dominates in terms of the strength of the human capital that exists in this area. And then when you take that and look at what are the fields these people are trained in, again, you see this very heavy tech emphasis, engineering, STEM fields, that are now and will continue to be the growth areas in this agglomeration, including the South Bay, and are leading to really important capital flows, which I’m going to talk about in just a minute.

And that’s the growth of tomorrow. And sure, perhaps we will be working at home less, or, well, perhaps, as we grow, but there still will be the work from home component of this. But I think what is more important is thinking of where the capital dollars are going to be spent and how the Bay Area can attract those dollars. And these are the ingredients of a really positive future.

And the fact that, really, the pandemic hasn’t changed this much at all is really important, and especially with the venture dollars that are coming in with new areas and new inventions that are very much complements to what’s already here. So obviously, we’ve seen the other part of this. The San Francisco population trends are not that favorable. And in many ways, this has to do with a very significant lack of housing. California is way behind in producing housing.

And the recent information from Stanford, San Francisco, that it takes five to seven years to get a permit to build anything is really remarkable– and the fact that the UC Berkeley been battling the courts over the fact that students are now deemed pollution under the California Environmental Quality Act, and we’ve only just prevailed in those court suits. So we haven’t been able to build housing in Berkeley related to the university for about 15 years.

We have a lot downtown. Berkeley is really to be credited with this. But there are reasons for this, the long commutes, having to live further and further away because of the price of housing. So although the population trends are not favorable right now, especially to our cheaper competitors in Texas, Florid– Houston. I was in Houston, it’s booming, and Florida as well, I do think the big drivers of the capital flows are going to sustain the Bay Area.

OK, so how do you take what’s the positives, which is what I’ve been stressing. I have– none of us really have been talking about crime, homelessness, mental illness, the fentanyl crisis. These are big issues. I wasn’t asked to talk about those. But we have some ideas about that as well. I think a key thing is the slight imbalances, especially in downtown San Francisco, with the lack of housing. I just was in New York. And New York is booming. And there’s just a lot more housing in New York in the central business areas than there is in the Bay Area.

So I think this is going to take us reimagining what San Francisco downtown can be and what live, work, innovation hubs could be. And thinking about this, promoting 3D printing, additive manufacturing, smaller site manufacturing, AI innovation and research offices. And even though my map didn’t project well, of this $45 billion of new venture capital, a lot of it’s located in the city. We have actual maps of where these things are located.

And then universities satellite campuses and research labs, so we’re very proud about the new NASA Ames Berkeley partnership. That’s a $2 billion capital investment which has just been deployed. Those agreements came out in October. They’ve been in the works several years. But nevertheless, this is a huge satellite source, a site for the University, and for harnessing this human capital that’s very much a part of our labor markets.

And there are other opportunities in failed malls, especially in San Francisco, that the universities and the labs can take advantage of. The other thing that’s really interesting is with the falling prices in the office market, I’m less confident about rehabbing office and turning it into housing, but I’m very confident about repositioning A minus and B plus buildings into innovation hub sites. And again, that’s where this new capital flow and the investments that are coming with it, and the real estate deals that are happening around this, because it is currently a buyer’s market.

So the positive side of this negative is that when you see the cost per square feet has gone down from 600 to 200, these are perfect sites for all this new venture capital, these new industries, and the strengths of the area. Another untapped area that we’ve been working with a lot at our center is all the mall space. We have a lot of failed malls, or poorly performing malls. All in all, we’re talking about almost 200 acres of space.

So one of them is the San Leandro Mall, the Bayfair Mall. There’s also one outside of USF, the Stonestown Mall. And then in Richmond here, just north of Berkeley, there is the Hilltop Mall. Each of these are between– 50 to 70 to 170 acre sites. And right now, they’re being repositioned. All of them have significant real estate capital that’s just moved there, large scale investment, supported by the local communities.

And what’s planned for these are transit oriented development, which is extremely important, and significant workforce housing. So these are dollars that have already been deployed. These are dollars that you don’t see yet, but the dollars are there. And they’re here to house these people in a closer way because they’re tied to the BART stations. And then lastly, this is– there’s been a lot going on, especially in sustainability and alternative ways of funding.

I mean, when interest rates are at 8%, people have to get creative. But a lot of creative dollars have been unlocked. Our university is really working on accessing those dollars having to do with transportation related infrastructure, carbon neutrality related investments. And we need to harness our congresspeople and senators to bring some of these federal dollars here. So what are these programs? Well, they’re the Inflation Reduction Act, which comes with tax credits, which is all designed for infrastructure.

We’re looking at that for a huge new energy plant here on our campus. And this is going to go on in other places in the city as well– buildings, roads, and also the BART stations. So just last week, the Biden administration announced the new Transportation Infrastructure, Finance, and Innovation Act. Again, these are federal dollars that are competitive, but there’s no reason red states should get all these dollars. We need to harness our elected official human capital to access some of these dollars.

And then there are other programs. There’s a Good Neighbor program, the sale of federal buildings, unlocking California low income housing tax credit dollars, which have not– and this is Fiona Ma. It’s she that controls those dollars– towards more transit and lower income sites for that investment. And that’s where a lot of the housing dollars, and especially the workforce housing dollars are going to come from.

And then lastly, creative uses of tax incremental finance– so the state has not experimented with these other sources of capital as much as they should, but these enhanced infrastructure financing districts are going to be very important. There have been two or three of them approved by local governments. And they’re, again, very transit oriented, one of them being the West Oakland BART station.

And these are ways that we can start building the infrastructure, especially around housing and transit access, to provide the workers that are going to go back at least three days a week to San Francisco. Thank you.

Amir Kermani: Thank you so much, Nancy. OK, so I think now it’s time to open to questions. We do have our own questions as well. But I think let’s just start from the questions of people in the room. Then, we will see a number of questions that we have on the Zoom. But we may– like, depending on that, we will decide whether after this, go to our own questions, and then to the Zoom call questions.

Audience member: OK, so I guess the message for Ted and Nancy is timing, because if you look at over 30,000,000 square feet available– and, you know, San Francisco’s pretty desolate compared to what it was before, downtown area. So what’s the timing for all this innovation to occur? And is it a shakeout where we lose 40% of office space in San Francisco? Because I have businesses in downtown and in the financial district, and it’s been pretty significant impact from that standpoint.

And it’s flat. I agree with you, 100%. We’ve seen it for years and years and years.

Ted Egan: I would say one of the reasons I less expect we’re going to lose the spaces is I don’t know what we would lose it to. It’s in the nature of the structure of the San Francisco economy– but if you lose it, you know, what we’re seeing in the reset or bottom finding of the office market now is office buildings selling for $200, $300 a square foot that were $800, or $900, or $1,000 a square foot. You’re not seeing zero. You’re not seeing boarded up abandonment, blight, just not seeing that now.

You do see that in a lot of cities that have a doom loop, but you’re not seeing that in San Francisco. So again, I raise the question of is there a higher and better use at that kind of price? I don’t see it. It doesn’t seem to be housing. I think housing needs to be, like, less than $100 a square foot, in which case, I’m not that worried about that. But I take your point about timing. I mean, there’s a dynamic going on. A couple– you’re always sort of dealing with contradictory threads of evidence.

And one thing you’re hearing is there was a ton of startups that got a ton of venture capital in San Francisco in 2020 and 2021. People have been waiting for them to sign leases for a while now. And it’s just not happening. On the other hand, when I talk to tech companies about, what’s the deal with your return to office, San Francisco tech companies, a refrain I hear over and over again is the people who live in the suburbs don’t want to come to the office very often.

The people who live in the city, who tend to be very young, in their 20s, they have no problem with coming in the office five days a week. The pre-COVID energy around, yeah, it’s very normal to, like, share a house with eight other techies, wake up and code, go to work, code until six, do some hackathon at night, it’s starting to– that lifestyle is starting, I think, to reemerge because of AI. That could drive office demands when we actually see rents drop to the level that prices have dropped, where they’re nowhere near– a 60% or 70% correction.

But if they get there, who knows what these startups that are sitting on a lot of cash will do with the space?

Audience member: And as follow up, when you said, like, kids don’t mind working five days, I have a son, just graduated from Cal. He’s in management consulting. And one of the concerns is– and this is to your point, Nicholas, is like, how do young people get the mentoring? On a high level, it makes sense. The 30, 40, 50-year-old guys, they don’t want to come back to the office. They don’t want to commute in from the East Bay into the city. But the young people– like, my son worked at Accenture.

There was nobody in the office for the young people, like, the 20, 25 year olds. And Accenture, their culture is based upon flying to the client. The clients are not in the office. They’re at home. So how do young people being at Stanford or Cal get the mentoring that a lot of us had in our 20s and 30s– you know, you get in an office. How does that– I don’t know if there’s studies around that? Maybe not enough time has passed to figure out that impact.

Nicholas Bloom: No, first of all, I totally agree. I remember talking before that– I had a discussion with my daughter yesterday, who’s 20, on a summer internship, essentially, applying for them. I was like, you really want them in person, at least four days a week in person. So I’m totally aligned. And if anyone that has kids in their early to mid 20s, or my students in my MBAs, you don’t need to be in the office five days a week, but try and be in at least three.

Now, how that works, you’re also correct. I worked at McKinsey years ago. I was there for a couple of years. And yes, you’re often at client site. But you’re at client site with senior partners. And you know, I remember my PMI manager. So I’ve talked to a lot of professional service firms. I remember talking to a bunch of big law firms. They have this real problem. The associates, the entries, want to come in every day, or four days a week. The middle level and particularly senior level partners don’t.

They like to have a nice house– you know, my kids are at home. I don’t want to– it’s cold. I know my clients. And so it’s really, like, the heads of these firms to tell the folks, the partners, part of your job is not just making money from clients. It’s mentoring people below you. And so this is one of the reasons why you need some consistency. And I think for middle and senior managers, they should really be, typically, in the office– we’re seeing three days– so three days in the office, two days at home. That’s a kind of normal thing for new hires.

I could easily see a fourth day a week. Let’s say you always come in Monday and different managers rotate around from different teams. So when I was at McKinsey, Fridays, we had BCR, basic consulting readiness. And different managers came in. But I’m totally aligned. For people in their 20s, my advice is probably be in the office at least three days a week, because you do pick this stuff up. That’s not true. We see a very u-shaped pattern, by the way, in terms of– we were just talking about this earlier.

I was just looking at data from Gusto and distance to the office by age, because they have amazing payroll data. And they know exactly where you live because you have to get your home address right for tax compliance. And it turned out, pre-pandemic, distance to work was basically flat with age. Post-pandemic, there’s an enormous bulge for people in their 30s and early 40s that have moved far away because they have young kids. People in their 20s and kind of mid-fifties onwards haven’t moved nearly as far.

Nancy Wallace: Yeah, and I think to your point– is this still turned on, yeah. If you’re in this business, you know that there is dry capital waiting to come into the markets. There’s actually quite a lot. And firms have already moved. These are major firms. And the other interesting things is the cities are now wanting to be accommodative, even San Francisco. So the Bayfair Mall– San Leandro is bending over backwards to make sure this thing works, and all kinds of willingness to think about how we handle the land, how we handle densities, how we handle alternative structures, how we handle parking– get rid of it.

I mean, really using these sites intensively in a mixed use, live, work kind of environment that are very well designed. And then to the point of all of us talking to our children, you have no idea how excited MUI’s are to build housing that they can afford to live in. There’s been– I mean, we’ve been now working with these site developers and coming up with creative solutions that are energy efficient and affordable, where we can build a capital stack that actually makes some sense, is possible.

It’s even possible today with interest rates as they are, but not unless we have the help from the cities themselves. And I think that’s where we’re seeing the help. We’re seeing it with tax incremental finance from Oakland. We’re seeing it with the willingness from San Leandro and Richmond. And now, we need to see it from San Francisco. And we only need a few of these tax dollars to make that happen, and they’re geared to performance.

So it’s not really a great burden for these cities. But given that there is land available– I mean, that’s been the big problem, of finding the land. And now, we’ve identified the land. It’s in play. Real dollars have been invested. The signature of housing development with Hilltop is within the next 18 months. San Leandro is going to be slower. And Stonestown is going to be even slower. But it’s not going to be five years, nothing close to that.

Audience member: Hi, so I was also curious to ask about the long term. But I also noticed that– it seems that the first speaker was describing that the people who were leaving the city mostly are low income workers, not the tech sectors. And then the second story, from you, was a slightly different. And it seems like it’s probably a complicated picture of different sectors, but part of the story is the fact that within tech, it’s maybe about age and seniority.

But I wonder, like, what you all think about the long term social effects of this kind of– where working from home and proximity to your office space becomes something that is really sector specific, income specific, age specific, and what that will do to the dynamics of the city. And socially speaking, if there’s a bunch of young lower income people living in the cities, but also very low income people living very far away and commuting, or– I mean, the picture is probably complicated.

But yeah, I think just– it seems like there’s multiple different stories happening at the same time. And the picture of who lives in the city might become something that’s really, really shaped by people’s income, age, and other things.

Ted Egan: I can take a stab at that. Just to kind of clear up, I think, some of the uncertainty, at least, that my chart caused, I’m looking at the San Francisco metro area in that chart that shows tech workers aren’t moving out. There is a reallocation of people out of the city to the suburban areas, like the map that Nick showed. It’s also true, though, that most of the people who moved out of San Francisco were not techies– and again, from the city, more than half the food service workers were not food service workers in San Francisco in ’22, for example, compared with a 7% loss for the tech occupations.

You’re raising, I think, the most important question for the future of San Francisco, which is– if the value people attributed to San Francisco housing because it was near a high paying job, if that goes away, what takes the place? What is the new reason to come to San Francisco? And you could ask that question about housing. You could ask that about offices. And it’s happening at the same time. So that’s a long way of saying I don’t know, but it will be an interesting thing to watch.

Amir Kermani: So actually, can I do a follow up on this– so because I think that’s the most important question. Like, I mean Nick ended his slides with saying that the solution going forward is to make cities as a place for consumption. But a lot of people who are providing to them, to the leisure service, are slightly lower paid jobs, which means that unless we can have affordable housing nearby the cities, or we can increase the supply of affordable housing nearby the cities, we cannot make cities the place of consumption.

So it looks like a big part of the answer to all of these questions is that, how can we make, like, Richmond or like all of these locations that are accessible to the downtown of the city by BART– but just increase the housing supply nearby those locations. Make those large enough sites that, basically, it’s not going to crowd out the existing schools, or existing, like, infrastructure in these cities.

Ted Egan: I mean, there are things you can do to add housing that don’t cost you money. And those are probably– this is probably the right time to look at those plans again. And yes, you may have to build more schools. And you may have to do actual, comprehensive planning. That’s not the end of the world. I do think– I mean, just looking at San Francisco, it’s not going to be a great climate for development because of the trends that we’re talking about for the foreseeable future. I mean, until these markets adjust, it’s hard to talk about housing.

It’s hard to talk about office development like people were before.

Paul Pierson: So my question is a little bit of a follow up on that, actually. But first, I just want to say, what a fantastic panel. I mean, just so, so much information and analysis that’s really helpful for understanding where we’re at. I just wanted to take Nancy’s little invitation to ask you about homelessness, and both as a cause of some of the donut– and the acuteness of the donut effect in San Francisco. Like, to what extent does it create both a push and also a limitation on pulling people back in?

It certainly– as somebody observing it on a human, individual level, it seems like it’s a big, big deal. And then the other, maybe more upbeat aspect of it is, will the declining costs of housing that you’re seeing in the Bay Area in San Francisco, in the long run, will that have any effect in helping to address homelessness? I’d imagine that there’d be quite a lag, but I’m interested in both– how much it’s affecting the dynamics you already see, and whether changes in home prices are likely to have any healthy effect in the long run?

Nancy Wallace: So building requirements of all new properties are 30%, at least, of all the units have to be affordable, so even very high end looking properties in the city have a 30% affordability requirement. And it’s at the local level, so we’re looking at below the median income level quite substantially. And all of the plans going forward in these sites include elements of affordability.

But they’re not– and Berkeley’s issues, too, our own university, with People’s Park, and the facilities that we’ve been asked to build along with it– mental health facilities, health services facilities, most of the cities are also thinking of those kinds of services, although I think this is probably more a state level problem, especially with the drug problems and the mental health lack of services. And I’m not sure the cities can solve it.

But right now, we’re using the hospitals, which is a ridiculous use of hospitals. We simply don’t have the services for it. And we haven’t built the housing, and it’s because the permits were not available. I mean, we have a sort of a view of housing, and protecting our land, and keeping everything the way it was. And I think these shocks are going to change that. They already have. And the hope is, none of this– we’re not planning, you know, palaces for the tech workers. That is not the plan.

And a lot of it, we need entry level housing as well. We need student housing. We need all kinds of mixed house uses. And we just simply don’t have it. And the way we solved the tech housing problem was we forced people that had good paying jobs, but they were living eight to an apartment. And they didn’t like that very much. And we’re trying to come up with ways that we can finance to build more reasonable structures. And I think there’s some optimism about actually achieving it.

Amir Kermani: So on the homelessness section, I think it’s very interesting, because I was– I was, that was also the number one issue that came to my mind when I was thinking about this. It’s very interesting that California has one third of all homeless people in the US, but 60% of homeless without shelter. Unfortunately, like, we have been always very bad on that dimension. The thing that I didn’t know was that the number of homeless people didn’t increase that much compared to before COVID, at least in San Francisco. In some of the suburbs, it actually increased.

But in San Francisco, it didn’t change that much, which– I think it has two sides. One is that maybe we don’t need to wait until we solve that problem before, like, the cities start growing again. On the other hand, it’s crazy that we haven’t solved that problem, even at the time that the city was growing a lot. And I think we can be much more innovative in solving that, because, like, perhaps for people from Berkeley, you all received that email yesterday. There was a robbery on Berkeley Ave.

And it was about, I mean, basically grabbing two bananas, two orange juices, and, like, one water bottle, something like that. That’s something that– I mean, if we had like, I don’t know, like, food banks close by, perhaps it would have been avoided. So it seems that– I mean, there are some obvious things that we are not doing. And there are– I mean, and perhaps that’s a place that we should think much more about it.

Ted Egan: I mean, I think the main thing I would say about homelessness in the context of our talk– and I get this question a lot of, but there’s a lot of homeless. There’s a lot of drug use. There’s a Whole Foods at 8th and Market that closed. Surely, you’re in a doom loop– is that this is a long standing problem in San Francisco. And it hasn’t, in the past, affected people’s commuting to downtown office buildings where from 75% of the city’s GDP is generated. And I don’t think it is now.

So yeah, it’s a great conversation to have. It’s just not a great explanation for San Francisco’s economic problems. As for the attractiveness of downtown housing, it’s probably an issue. But it’s got a pale in the context of, you mean, I don’t have to go to the office five days a week? So why should I pay $1,500 a square foot for a condo? I mean, I think that that’s the real change that’s unleashed the sort of donut effect.

Amir Kermani: Sorry, Julia, how many questions do we have on zoom? Do you mind if we first ask, like, the question–

Julia Sizek: OK, so one of our questions from Les Guliacy is about the dynamics within the bay. So San Francisco has lost many of its historically big businesses and employers, notably Chevron several years ago to San Ramon, and more recently, PG&E to Oakland. The developer which bought PG&E’s properties on the square block of Market, Deal, Mission, and Sphere has announced plans to build what they claim to be a premier office park and residential space.

Given the risks that you enumerated, is this developer’s plans fanciful? And how realistic is this kind of development?

Amir Kermani: Do you do that–

Ted Egan: No, no, I insist. I’m not in the business of giving developers advice on how to–

Nancy Wallace: The capital is going to be deployed. These are risky ventures, and we’re at the trough– we’re headed to the trough in the business cycle. And this is where the big returns are made. So this is a pattern that we’ve been through multiple times in the city. And as buildings come out of the hands of certain players, they’re going to go into the hands of others. And whether or not we’re at the bottom is the real question, and nobody knows the answer to that.

Amir Kermani: OK, and there’s one more or–

Julia Sizek: Yeah, you can give one more, which is sort of– which is from an urban planner, McDodd Burewala– is financing really the issue when it comes to housing availability? From my understanding as an urban planner, it seems like there’s a lot more land use resistance to promoting dense buildings and moving away from single family housing. So how is work being done to persuade and work with older, generally wealthy, long term residents of the city to embrace an influx of more affordable housing when it can be argued that it doesn’t necessarily bring a lot of benefit to those same residents?

Ted Egan: I mean, I think if we consider some of the economic and geographic trends that– post-pandemic– that we talked about before, I really think that the– and we’re seeing this now in the San Francisco development story. The appetite for infill is just not what it was. And it’s a remote work, so this is a structural shift. To kind of close the loop about your homelessness point, sure, cheaper housing in San Francisco is good for homelessness in the long term.

But massively growing housing prices in the Central Valley is bad for homelessness in the long term. And they’re in the same state as San Francisco, so maybe the housing conversation needs to have a reset, too, about what kind of housing, where, for what reason. Just a thought.

Amir Kermani: But isn’t that question also the reason for why we should not think about just building a few more, like, I mean, of these, like, multi-unit family housing, but, like, having very large sites, as Nancy was saying, and having– like, doing a planning– something that houses school of itself, something that has the infrastructure, so it’s not crowding out the existing–

Ted Egan: That’s great. We have a bunch of those in the pipeline in San Francisco. And they are kind of in the same situation that most of the rest of the sites are, which is there’s no demand, and so they’re not moving forward.

Amir Kermani: There’s no demand?

Ted Egan: Well, I mean, if you look at the price trends, I mean, it’s not the not the best–

Nancy Wallace: To get the rents. It’s hard to get the rents right now.

Nicholas Bloom: I mean, one thing on housing, to come back to the question earlier, how you align Ted and my data– Ted’s data is by where you work, mine is by where you live. So that’s why there’s a difference between– and the reason I raise it now is a lot of techies used to live in the city and work in the city. A lot of people in food service used to live outside the city and commute in to work every day. So that’s why the jobs have gone. The people haven’t really shifted there.

So the reason this affects housing is, well, you previously had a lot of people living around the city, commuting every day to work on minimum wage, or not much above minimum wage jobs and go back. It was a pretty bad existence. Many of those jobs they’re working have moved out to the suburbs. So these office workers that are no longer eating at, you know, Panera Bread or Pret a Manger in the city center are getting their food in the suburbs.

In fact, I spoke to the board of Panera Bread and they said they’re roughly flattish on sales. They’ve plummeted in city centers. They’ve boomed in the suburbs. That helps the housing crisis, because of course, if it’s cheaper to have housing out in Central Valley– and more people are buying sandwiches in Central Valley because they’re not going in every day. So one of the odd things in work from home is by taking retail spending out of the city center, you see, that’s what explained Ted’s chart, which is on by where you work.

But those jobs have moved. They’ve not disappeared. They’ve moved out to the suburbs. And the people that work in them can more easily live there. So if you can build housing out in Central Valley, where the land is a lot cheaper, you solve a lot of the housing. There’s no need to build it all in the center of the city because a lot of the jobs have moved out. So it’s probably like a fifth the price to build housing out in Central Valley, on basically vacant– I mean, if you fly over it, it’s agricultural land.

Some of it isn’t even irrigated because the water is now– it’s so expensive, it’s just totally vacant. So I think that’s a better solution, rather than converting expensive office buildings, is to build some new housing, because there are jobs out there now that there weren’t, because these office workers are not going in.

Nancy Wallace: Plus, it’s not economic to transfer office buildings. And I–

Nicholas Bloom: I agree. I think the future of office, eventually, within – Ted and I were at an event which the city held with JLL. And they had this prediction– eventually, office vacancy rates will return back. They said they predicted it would happen by X. And I was, like, is standard X was 2033– like, 10 years. And eventually, it will. But basically, no one’s going to– this is the nuclear winter for office construction.

Like, there are some things that are being built that started pre-pandemic, but nothing’s being started now. Eventually, if you don’t start any office building for 5 to 10 years, at the fringes, some is converted, some is torn down. Eventually, the stock slowly shrinks. Office vacancy rates will go up, but not because people are moving back in. It’s just the offices are just closing. But yeah, you’re right. Conversion of big floor plan, 1970 buildings is not happening.

Audience member: If the forecast is 2033 or recovery, or 2035, then, to Ted, if you’re a local– like, we’ve been talking at a macro level. Let’s talk at a micro level. If you’re a small business in the financial district of downtown San Francisco, you’re on a percentage rent deal, which means it’s not a fixed. But the demand is so low– you’ve got to cover labor and your material costs, and it’s not a good return on investment, what do you tell the small restaurant or grocery or retailer in downtown– or financial– San Francisco, with a 10 to 15 year potential correction?

How do they survive? What do they do?

Ted Egan: They are changing the costs that are variable. The cost– I mean, all costs in the long run are variable, right, so you need some reasonableness on your lease. You will only open for lunch. You will– you just economize. You don’t– I mean, downtown businesses already only make money five days a week. There’s no downtown San Francisco weekend business. So now it’s a three day week or a four day week. They just adjust to that.

And yeah, we have a 20% reduction in businesses downtown for that reason. And we don’t see people flooding in at the moment. But I mean, I think that’s the future. It’s the future for transit, frankly. I mean, when you think about transit, I’ve heard two different rhetoric. And I won’t name– I’ll name the second agency. The first agency said, fewer people are using our service, so we must raise prices. That’s bad. The other one is saying– BART’s saying, not as many people riding our trains, we’re going to make the trains six cars– excellent.

Excellent, you’re not entitled to your own car on Bart. But it’s better to have a short car every six minutes than a long car every 20 minutes, right? So that’s smart. And those are the kinds of adjustments that I think we’ll have to see.

Nicholas Bloom: The value of offices is down 70%. The value of, probably, retail at the foot of those offices is also maybe down 70%. So rents need to go down. I mean, this is like market clearing econ. The rents have to keep dropping until businesses can make money. And if you’re paying rent and you can’t make money, and you tell your land– yeah, you may need to drop. It needs to drop to a point in which businesses can make money in that space, basically, yeah.

Amir Kermani: OK, so I think the time is up. So thanks, everyone, for coming. I think I personally learned a lot, so thank you so much.

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