“It’s one other really superb gold rush!” Marc Benioff posted on X in September 2023. The founder and CEO of Salesforce was celebrating San Francisco’s AI-fueled revival, touting a report that pegged demand for brand new workplace area within the metropolis at almost 1 million sq. toes. By February 2024, The Economist was declaring that “San Francisco staged a stunning comeback.”
It appeared like fairly a turnaround for a metropolis whose epitaph had been written many times because the pandemic. Simply months earlier than Benioff’s exclamatory submit, Salesforce had diminished its workplace footprint, leaving town’s tallest tower a pricey emblem of city decay. Based on the “city doom loop” speculation, diminished demand for workplace area would result in a collapse in business real-estate values and, in flip, a decline in metropolis revenues and companies—which might then push much more companies and employees out of town. San Francisco, which famously skilled a serious exodus of employees throughout the pandemic, was lengthy thought-about the doom-loop poster baby. If it might rebound from its struggles, then maybe the remainder of America’s cities would additionally keep away from that destiny.
However the comeback will not be what it appears, and a doom loop continues to be attainable. Traditionally, a booming economic system has reliably translated right into a booming commercial-real-estate sector. Now, nevertheless, San Francisco and different so-called celebrity cities have entered a sort of Schrödinger’s economic system, booming and busting on the similar time. Metropolis leaders should come to phrases with the truth that pre-pandemic workplace demand is rarely coming again, and plan accordingly.
By mid-2022, San Francisco was in hassle. Tens of hundreds of individuals had moved out of town, notable venture-capital buyers had relocated to Miami, and a number of native tech firms—most notably Meta—had introduced plans to embrace distant and versatile work completely. The municipal price range deficit continued to broaden.
Nationally, most cities have been doing higher, however the common emptiness price was nonetheless inching into file territory. In October 2022, Bloomberg’s financial forecast put the percentages of a recession at 100%, and the scenario appeared like it might solely worsen. Barring some sort of deus ex machina, San Francisco and different cities appeared destined to proceed spiraling downward.
After which God stepped out of the machine. In November 2022, San Francisco–based mostly OpenAI launched ChatGPT and kicked off a brand new expertise increase. In 2023 alone, buyers poured almost $30 billion into artificial-intelligence start-ups and billions extra into AI-related public firms, a lot of that are based mostly in and round San Francisco. Financial circumstances throughout the nation have been equally stunning. The “inevitable” recession didn’t materialize. By early 2024, the S&P 500 reached a brand new all-time excessive, unemployment remained low, and expertise shares reached a degree of valuation (maybe overvaluation) that exceeded the dot-com bubble. In lots of cities, together with San Francisco, internet migration flipped from adverse to optimistic.
However one thing nonetheless wasn’t proper. Within the first quarter of this 12 months, the nationwide office-vacancy price reached 20 p.c, the best degree on file—even larger, barely, than throughout the 2022 doldrums. In San Francisco, greater than a 3rd of all workplace area was vacant. In actual fact, shortly after Benioff’s celebratory X submit, Salesforce once more shrank its footprint, this time by 700,000 sq. toes. The AI increase was actual, however so was the specter of city doom. An analogous dynamic has been taking part in out in cities throughout the nation depending on a wide range of different industries.
That is uncommon. For many years, workplace demand has been correlated with macroeconomic indicators, that means that when the economic system is robust, so is demand for business actual property. A mannequin developed by the Business Actual Property Growth Affiliation (generally and confusingly identified by the acronym NAIOP) has executed a reasonably good job of predicting and explaining workplace demand based mostly on GDP progress, company earnings, employment, and different financial indicators because the early Nineties. However beginning in 2022, that historic relationship broke down. Because the economic system emerged out of the pandemic, the mannequin predicted that internet workplace demand would enhance by 43 million sq. toes. In actuality, internet demand was almost 90 p.c decrease than anticipated and, by the next 12 months, had turned adverse, that means extra space was vacated than leased.
What explains the divergence? The apparent offender is the rise of distant work.
4 years after the preliminary COVID-19 lockdowns, greater than 1 / 4 of all paid workdays are carried out from house, in keeping with an ongoing survey by the Stanford economics professor Nicholas Bloom and others. The primary purpose firms are lowering their workplace footprint is as a result of they’ll. As extra leases come up for renewal, emptiness continues to rise. Even with no recession, this pattern is more likely to endure as tenants proceed to precise a need to chop down or let go of present places of work forward of a wave of lease expirations in 2025 and 2026.
Throughout the tutorial group, there may be some debate as as to whether components apart from distant work, akin to rates of interest or recession expectations, are additionally in charge for persistently excessive emptiness charges. One factor is evident: Even when the economic system continues to develop and unemployment stays low, excessive workplace vacancies could have an opposed impression on municipal budgets and residents’ high quality of life. Decrease crime, a rebound in tourism, and a slight enhance in inhabitants received’t be sufficient to offset the lack of income from business property and enterprise taxes due to decrease rents and decrease spending from common commuters. Cities can diversify their tax base, however that may require adjustments to the bodily setting that take years to materialize, plus direct funding and tax incentives. It will additionally necessitate a way of urgency and dedication that has been missing in lots of cities—significantly in mild of the current “comeback.” Stijn Van Nieuwerburgh and Arpit Gupta, two of the authors of the unique doom-loop paper, have just lately up to date their estimates based mostly on the most recent knowledge and undertaking that, regardless of some excellent news, “many American cities … will face important tax income shortfalls within the years forward.”
Van Nieuwerburgh and Gupta’s newest evaluation features a new concern that was not a part of the unique thesis. Synthetic-intelligence advances might cut back the variety of workplace jobs and enhance the standard of distant collaboration. Knowledge from the epicenter of the AI revolution presents a preview. In 2003, the 12 months during which Google first handed the $1 billion income mark, the corporate employed some 1,600 individuals. Final 12 months, OpenAI required lower than half that variety of employees to exceed the identical milestone. Over the previous 18 months, Large Tech firms laid off tens of hundreds of staff whereas rising their income and hiring fewer—however higher-paid—AI specialists. The “1 million sq. toes” sought by San Francisco’s AI firms appears like quite a bit, however it’s overshadowed by town’s 30 million sq. toes of vacant workplace area and the specter of many extra lease expirations within the coming years.
AI threatens to make the connection between financial exercise and workplace demand, and thus between financial exercise and city-budget well being, even much less linear and predictable. The chance alone is sufficient to inject extra uncertainty into labor and workplace markets which can be already on edge. An economic system during which most firms can predict their wants upfront and decide to long-term leases will not be returning any time quickly.
Ever because the pandemic, many landlords, mayors, and managers have been going by what one may name “the 5 phases of workplace grief.” First, in 2020, there was denial that working from house would have any lasting impression. Then, in 2021, there was anger at staff who wouldn’t return, adopted by bargaining on the precise variety of days individuals would spend on the workplace. By 2022, melancholy had set in, and cities appeared prepared to just accept the necessity for radical change. Now, nevertheless, the nation’s financial rebound supplies new ammunition for many who want to slide again into denial.
Our cities might be higher served by embracing the transition to a world that’s much less centered round places of work. That can require diversifying their financial base, streamlining the development and conversion of latest housing and mixed-use neighborhoods, enhancing public companies, and doubling down on what makes city life enticing in its personal proper—not simply as an employment vacation spot. And the hassle should begin with the popularity that, in good instances and dangerous, the connection between financial exercise and workplace demand has modified without end.
