Disclosure: I live in SF and co-founded www.daybreakhealth.com which is fully remote. I am, 100%, part of why this tower, and others like it, are empty.
> "[...] Mayor Breed, who in an interview earlier this year said that “for this city to be thriving, we need people back in the office.”"
This is such a frustrating statement. If I were going to make this point I would say "for this city to be thriving in its current incarnation, we need people back in the office." Sadly, the mayor, as espoused above, and at least one city supervisor (Matt Dorsey¹), simply do not seem open to the rebirth necessary to make this city thrive again.
In 2020, in preparation for the debates with my co-founders on whether we should establish a fully-remote or fully-in-office culture I spent a lot of time trying to understand what remote work would mean for the Silicon Valley Business Cluster² and San Francisco in particular. I built a working theory for how Silicon Valley functions as a business cluster, San Francisco's role within that cluster, and San Francisco's city finances. Based on that working theory I built a cone-of-possibility broken out into four main scenarios that looked something like this:
* Theory 1 - Remote Work is a Pandemic Only adventure. Workers will exit the major cities, first in fear, then in pursuit of better personal finances. The pandemic will end, and the functions that drew workers into the city in the first place will reassert themselves. Workers will flock back to business clusters, the cities within them, and the offices in which they used to work.
* Theory 2 - Remote Work isn't sustainable for workers in most industries. Workers will exit the major cities, first in fear, then begin to hate their new normals. They will return to the city, and to the office, possibly before the pandemic ends.
* Theory 3 - Remote Work in Software is here to stay. Business Clusters that relied less heavily on Software workers, such as LA's film cluster, or the Boston / Cambridge BioPharma cluster would see a return to the office. Yes, they would have a lower over all demand for office space, but we'd be looking at a mid single digits³ reduction. Meanwhile San Francisco's office buildings would become a ghost town. This reduction in worker need for office space in SF would drive a cascade collapse in its office districts. First the streets are empty of pedestrians, which collapses all the local retail, which draws in more of the unhoused, which trash the place due to lack of supporting infrastructure, which drives up the cost of keeping the streets from looking like the Tenderloin. All the while, commercial leases lapse or go up for sublet in alarming volumes. These forces of reduced software workers, reduced retail spend, and reduced office rents combined to create a financial collapse in SF's city budget, anywhere from 10 to 20% of city revenues. In the worst case, with vacancy reaching into the 70 or 80% range, SF's budget craters by as much as 30% forcing a material reduction in city services which exacerbates the unhoused problem, creating a vicious cycle.⁴
* Theory 4 - Remote Work is here to stay for all knowledge work. In this scenario, all of the financial woes that play out for SF in Theory 3, play out for any city that has a major knowledge worker dependency. The breadth of the commercial real estate collapse begins to threaten the solvency of many banks. The workers, faced with the isolation of in-home work begin to branch out socially in their evenings and weekends. We see a resurgence in hobbies that bring people together.
By my understanding we're currently somewhere between Theory 3 and Theory 4. I think my theories were a bit aggressive on the potential collapse scenarios, but I'm seeing enough of what I predicted to feel comfortable in my reasoning. With that in mind, let's talk about how this ends: The lack of demand for office buildings in many cities results in the collapse of the system used to finance them. Banks and the hedge funds, REITs, pensions and other debtors take a monstrous haircut as the buildings are sold at huge (60%+) losses. A few will make it out OK, having held the buildings long enough to have turned a profit, but none of them walk out of this with their financial projections intact. The buyers of these buildings are, predominantly, in it to blow them up. The buildings are torn down and replaced with purpose-built housing and specialty offices (think biopharma or cultured-meat infrastructure).
This article, and 350 California Street in particular, represent the pin hole in the proverbial dam. I wait with baited breadth.
¹. I spoke with Dorsey for several hours during his District 6 Supervisor election campaign on this topic as I was living in his district. His views can be concretely summed up as a deep belief that tax policy alone can get office workers back. He seems unable, or unwilling, to distinguish between office tenants and office workers.
I think the driver of Theories 3+4 will be that with high interest rates we are heading into a recession. A major driver of this recession will be a massive collapse in commercial real estate and CMBS. As the recession really gets underway then the back-to-office movement will flip on its head and companies will start to really get aggressive about cuttings costs and shuttering offices in order to survive, which will only accelerate the commercial real estate collapse even more.
The headcount reduction in tech so far has been literally nothing. Mostly that was just readjusting for the post-pandemic hiring explosion in tech.
It'll still be 6-12 months though (at least) before higher interest rates really start to bite. There's $162B in commercial real estate securities maturing in 2023 which is going to be the first real substantial detonation in the economy.
That should set us up for having a really horrible economy in 2024, we'll probably be diving into the recession or hitting the bottoms around Nov 2024.
It does seem to vary. The few times I've commuted into Boston over the past six months or so both traffic and transit usage seemed to be pretty much back to pre-pandemic levels as was pedestrian activity within the city. SF seems to be at least something of an outlier presumably because tech is something of a bubble.
In general, I'd observe that there's been much more of a reset to pre-pandemic norms than many anticipated. But SF could well end up being something of an anomaly--which would be especially bad news for SF given it may not be a broad-based crisis that the government at the national (or maybe even state) level is going to be especially concerned about.
> In general, I'd observe that there's been much more of a reset to pre-pandemic norms than many anticipated.
I haven't traveled well enough recently to agree or disagree, but this matches my reading, so I'll take your argument.
> But SF could well end up being something of an anomaly--which would be especially bad news for SF given it may not be a broad-based crisis that the government at the national (or maybe even state) level is going to be especially concerned about.
Yeah... That's why I think we're somewhere between Theories 3 and 4. I was really hoping that the city supervisors would see that and start shifting SF's office core to be a more desirable and exciting place by reducing the barriers to entry for new brick and mortar businesses. Think more streets shut to cars, more bike only roads, massively more efficient and cheaper stall and cart permitting along with expanded areas of operation. Roll this together and you could essentially crawl the existing temporary street markets around the Ferry Building into the urban core. This would also provide an avenue for businesses to start and grow to fill the empty retail in the buildings around them, much the same that food trucks have become a stepping stone to brick and mortar restaurants.
>I haven't traveled well enough recently to agree or disagree, but this matches my reading, so I'll take your argument.
Yeah, it's not just return to office. I was at KubeCon in Amsterdam last week and it was the largest KubeCon Europe ever with 10K in-persona attendees. Add the 2K who wanted to go and couldn't get in and it was almost 2x the attendance of KubeCon in Valencia a year ago. (And that's in an environment where a lot of tech companies have cut back on travel spend.) So, nope, nope, conferences aren't all going virtual.
And, although I don't have numbers, I'm pretty sure that a lot of the food and grocery delivery and other services that really soared during the pandemic have probably largely returned to earlier levels.
That seems unlikely, since annual averages are about 50% of pre-2020 office occupancy.
Public Transportation data also shows volume at roughly half of pre-pandemic normal.
However, commuter rail has recovered less than other modes, so if some of those people are now driving to their office instead, then they will be making traffic worse than it would have been at an equivalent pre-pandemic office occupancy volume.
>However, commuter rail has recovered less than other modes, so if some of those people are now driving to their office instead, then they will be making traffic worse
There's probably some of that. At one point I took commuter rail after traffic seemed as bad as ever and it was pretty empty. But last time I took commuter rail in during December, it was back to standing room only again from about Waltham. (That said, I think the schedule is still reduced relative to pre-pandemic which both skews the perception of how many people are taking the train and makes the train a less attractive option.)
I'm honestly not sure though how to square the number of cars apparently on the road at rush hour with reduced office occupancy. Some of it is probably day sensitivity (more people commuting mid-week than Monday/Friday) given that occupancy--depending on how it's measured--than actual office vacancy which is high but at 18% not that high.
But I don't understand why people make such a fuss about some cities losing prominence and eventually crumbling from a previous period of wealth. This happens as history and technology progress.
I don't see how wealth is lost when it is just being redistributed. The workers didn't disappeared, they are just living elsewhere, bringing business opportunities and improving across many different places. Perhaps it will be healthier for the economy as a whole than having only a handful of cities as beacons of investment.
> I don't see how wealth is lost when it is just being redistributed. The workers didn't disappeared, they are just living elsewhere, bringing business opportunities and improving across many different places.
If I'm recalling the theory of it correctly, the whole reason Business Clusters exist (and form) is because there is, essentially, value in being together. Or at least, there's economic value in reducing the logistics required to move goods from one part of the value chain to another. For this reason I don't suspect we'll see the dispersal of manufacturing business clusters.
A huge part of my digging was trying to understand whether this applied to Silicon Valley or not. I decided that it did, but not because of the software, instead it was because of the VC + Startup relationship. VC's want to meet the people they're giving millions of dollars to and startup founders want to meet the people they're giving control (or massive influence) of their company to. It remains to be seen whether Zoom satisfies this need or not.
> Perhaps it will be healthier for the economy as a whole than having only a handful of cities as beacons of investment.
It might. Technology has changed dramatically since we last had material distribution into the suburb and rural areas of the nation. Maybe that will overcome the benefits of centralization.
Traditionally VCs centered around Sand Hill Road wanted all of their portfolio companies within easy driving distance so that they could attend at least two in-person meetings per day. Obviously that requirement has started to break down.
Proximity to universities has also been a key factor. Silicon Valley has two world-class research universities plus numerous second and third tier schools nearby to act as sources for new technologies for commercialization.
In the early days proximity to Moffett Field and NASA Ames also helped to launch the Silicon Valley innovation engine. There was a lot of cross pollination of people and ideas with military and aerospace.
I understand centralization in the sense that you so aptly put in bringing benefits in a very similar vein of economies of scale.
A bunch of businesses in the same city benefit from shared infrastructure (in a broader sense) and a large pool of labor.
But when we specifically talk about knowledge work, where the output is not a physical good (and even when the output is a physical good but that requires a lot of knowledge work before it can be produced) does the centralization even make sense? Technology vastly expanded the possibilities in terms of infrastructure and pool of labor. The limits now may be more in terms of the cultural shift and government regulations.
It's because politician's focus is to keep themselves employed and re elected, with entirely short term focus. They have special interests from the wealthy who try to influence policy, and usually wealthy people are in a system of making income off of others (i.e ownership).
To your point, it must just be a modern phenomena of the 24/7 news cycle and internet to get loud voices out there faster. Because if you look at the rust belt and places like Ohio that were thriving industrial cities you can clearly see that places come and go. Detroit is another good example of a new less glamorous normal. There are certain benefits of density w.r.t to economics and such but a river runs its course, if you try to mess with it one way it will eventually change in another.
Don't want to see them die at the expense of people that don't want to live there?
Remember, what is being discussed here is the fact that with remote work, commercial real state is low in demand. So we are effectively talking that workers prefer not to live there, given a choice, and the companies are fine in employing them remote.
The place didn't die. It's still there. But many people prefer to live elsewhere. You can remain there if tou like it so much, no one is stopping you.
I don't think you were too aggressive with theories 3/4 at all. The impacts from the pandemic, the Federal Reserve's reckless monetary policy, Congress' inability to figure out how to deal with the US debt, and Wall Steet's continual pursuit for profits are all pointing to an economic disaster. We're just continually spiraling into the calamity to come and everyone is in a petty blame game and culture war.
> "[...] Mayor Breed, who in an interview earlier this year said that “for this city to be thriving, we need people back in the office.”"
This is such a frustrating statement. If I were going to make this point I would say "for this city to be thriving in its current incarnation, we need people back in the office." Sadly, the mayor, as espoused above, and at least one city supervisor (Matt Dorsey¹), simply do not seem open to the rebirth necessary to make this city thrive again.
In 2020, in preparation for the debates with my co-founders on whether we should establish a fully-remote or fully-in-office culture I spent a lot of time trying to understand what remote work would mean for the Silicon Valley Business Cluster² and San Francisco in particular. I built a working theory for how Silicon Valley functions as a business cluster, San Francisco's role within that cluster, and San Francisco's city finances. Based on that working theory I built a cone-of-possibility broken out into four main scenarios that looked something like this:
* Theory 1 - Remote Work is a Pandemic Only adventure. Workers will exit the major cities, first in fear, then in pursuit of better personal finances. The pandemic will end, and the functions that drew workers into the city in the first place will reassert themselves. Workers will flock back to business clusters, the cities within them, and the offices in which they used to work.
* Theory 2 - Remote Work isn't sustainable for workers in most industries. Workers will exit the major cities, first in fear, then begin to hate their new normals. They will return to the city, and to the office, possibly before the pandemic ends.
* Theory 3 - Remote Work in Software is here to stay. Business Clusters that relied less heavily on Software workers, such as LA's film cluster, or the Boston / Cambridge BioPharma cluster would see a return to the office. Yes, they would have a lower over all demand for office space, but we'd be looking at a mid single digits³ reduction. Meanwhile San Francisco's office buildings would become a ghost town. This reduction in worker need for office space in SF would drive a cascade collapse in its office districts. First the streets are empty of pedestrians, which collapses all the local retail, which draws in more of the unhoused, which trash the place due to lack of supporting infrastructure, which drives up the cost of keeping the streets from looking like the Tenderloin. All the while, commercial leases lapse or go up for sublet in alarming volumes. These forces of reduced software workers, reduced retail spend, and reduced office rents combined to create a financial collapse in SF's city budget, anywhere from 10 to 20% of city revenues. In the worst case, with vacancy reaching into the 70 or 80% range, SF's budget craters by as much as 30% forcing a material reduction in city services which exacerbates the unhoused problem, creating a vicious cycle.⁴
* Theory 4 - Remote Work is here to stay for all knowledge work. In this scenario, all of the financial woes that play out for SF in Theory 3, play out for any city that has a major knowledge worker dependency. The breadth of the commercial real estate collapse begins to threaten the solvency of many banks. The workers, faced with the isolation of in-home work begin to branch out socially in their evenings and weekends. We see a resurgence in hobbies that bring people together.
By my understanding we're currently somewhere between Theory 3 and Theory 4. I think my theories were a bit aggressive on the potential collapse scenarios, but I'm seeing enough of what I predicted to feel comfortable in my reasoning. With that in mind, let's talk about how this ends: The lack of demand for office buildings in many cities results in the collapse of the system used to finance them. Banks and the hedge funds, REITs, pensions and other debtors take a monstrous haircut as the buildings are sold at huge (60%+) losses. A few will make it out OK, having held the buildings long enough to have turned a profit, but none of them walk out of this with their financial projections intact. The buyers of these buildings are, predominantly, in it to blow them up. The buildings are torn down and replaced with purpose-built housing and specialty offices (think biopharma or cultured-meat infrastructure).
This article, and 350 California Street in particular, represent the pin hole in the proverbial dam. I wait with baited breadth.
¹. I spoke with Dorsey for several hours during his District 6 Supervisor election campaign on this topic as I was living in his district. His views can be concretely summed up as a deep belief that tax policy alone can get office workers back. He seems unable, or unwilling, to distinguish between office tenants and office workers.
². https://en.wikipedia.org/wiki/Business_cluster#The_Silicon_V...
³. This is purely a guess, I base this on nothing but my assumption of how many software folks work in these industries.
⁴. That's leaving out the potential residential real estate cascades which in Silicon Valley could actually kill the business cluster itself.