Office Vacancy Rates in San Francisco Correlate with Crime Hotspots

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San Francisco continues to be recognized as one of the most beautiful cities in the world. However, there seems to be a lack of effective solutions for its deterioration. Homeless encampments have spread throughout the city center, and drug overdose cases are increasing. Additionally, nearly one-third of office spaces in the city remain unoccupied. With high vacancy rates, safety concerns, and remote working becoming more prevalent, it is likely that property sales at reduced prices will become the new norm.

In the second quarter of this year, the average vacancy rates in San Francisco reached 31.6%, a significant increase from 10% in late 2020, according to CBRE data. Unoccupied buildings are concentrated in areas with high crime rates, particularly those near the infamous Tenderloin neighborhood.

Recently, the federal government instructed employees based in a nearby office block to work from home due to safety reasons. California governor Gavin Newsom has also taken measures by deploying the state’s national guard to combat the sales of fentanyl, a synthetic opioid linked to increased thefts and drug-related deaths.

Property prices in these high-crime areas may experience the most significant decline. Research conducted by Trepp, which monitors the commercial mortgage market, indicates that non-performing loans are concentrated in these areas. For instance, Westfield shopping mall on Market Street witnessed a drop in its debt service coverage ratio from 2.2 times to 1.05 times between 2019 and 2022.

Violent crimes in the Bay Area remain relatively low compared to cities like New York. However, property crimes remain high and have not yet returned to pre-pandemic levels. The perception of increased risk may outweigh the reality.

In 2018, San Francisco experienced a boom in commercial construction, with 3,000 square feet completed amid the rise of tech stocks. The Salesforce Tower emerged as the city’s tallest skyscraper as part of downtown redevelopment.

However, the pandemic put a halt to this growth. Many employees took advantage of remote work options to escape the city’s high rents. According to a forecast from the Department of Finance, even by 2060, the city’s population is not expected to return to 2020 levels.

While San Francisco remains a hub for groundbreaking companies, such as OpenAI and Anthropic, these companies alone cannot fill the void left by other businesses in terms of employment opportunities and office space demand.

Lex is the FT’s concise daily investment column. Informed writers from four global financial centers provide timely opinions on capital trends and major businesses. Click to explore