An Airbnb-funded billboard shows opposition to Proposition F in downtown San Francisco, California.

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Marshall Luck’s chiropractic and massage practice in downtown San Francisco survived the Covid-19 pandemic thanks to government stimulus money and a large amount of debt. But more than two years since lockdowns swept the city, its business has returned to just 70% of pre-pandemic levels.

Like many of its small business neighbors—those that have managed to stay afloat—luck has been waiting for San Francisco to bounce back. It relies on tech workers at massive employers like Google and Salesforce, which is a challenge because those companies are being flexible with back-to-office requests.

As major cities across the country struggle to fully recover from the pandemic, San Francisco is on another level, as tech companies exit rents and residents scramble for more affordable locations. San Francisco Mayor London Breed’s office estimates that a third of San Francisco’s workforce is now remote and out of town. Last year, that resulted in a whopping $400 million hit to tax revenue, according to the Comptroller’s Office.

Downtown is finally showing some life. There’s more foot traffic, fewer shops are busy, and some restaurants and cafes that closed have been replaced by new tenants. But large, once-vibrant areas of commerce remain dormant, and merchants like Luck are in a fog of uncertainty, left hoping that workers will eventually return.

“The majority of our patient population is larger businesses, and as they come back, that will help us stay sustainable,” Luck told CNBC in an interview. “That’s what we’re hanging on to — that recovery.”

Deepening the struggle is the reality that Covid is not going away. With omicron BA.4 and BA.5 subvariants on the rise, the US is currently reporting an average of 126,000 cases per day as of this week, more than double the number at the end of April.

San Francisco Mayor London Breed speaks at a news conference about the next steps she will take to replace the three school board members who were successfully recalled to City Hall Wednesday, Feb. 16, 2022, in San Francisco. Francisco, California.

Gabrielle Lurie | San Francisco Chronicle | Hearst Newspapers via Getty Images

Bay Area commuters who take public transportation still prefer to stay home. Average daily ridership on Bay Area Rapid Transit fell from over 400,000 in 2019 to under 80,000 last year. As of May, the number had climbed to nearly 136,000 on weekdays, according to BART’s website.

“We’re still wearing masks in our office, so it’s still very much in our psyche,” Luck said.

Transportation data reflects the real estate picture. San Francisco’s office vacancy rate rose to 24.2% in the second quarter from 23.8% in the previous period, according to CBRE research. Other major cities are at historically high levels, but still below San Francisco.

Manhattan hit an all-time high in the quarter of 15.2%. Downtown Atlanta is at 22.8%, Chicago hit 21.2%, Los Angeles hit 21.8% and Seattle is at 20.3%, CBRE said.

“We’re slower than New York, we’re slower than Chicago, and that has to do with being so dependent on technology,” said Robert Sammons, regional director of Cushman and Wakefield’s Northwest research team.

Mayor Breed told CNBC in a recent interview that “most employees want some level of work from home after returning to the office, and many employers are offering that as an option.”

Salesforce, San Francisco’s largest employer, said last week it was once again downsizing office space in the city and is now listing 40% of a 43-story building that sits across from the flagship Salesforce tower. Coinbase closed its San Francisco office last year, and Lyft delayed its return to the office until 2023. Most of the companies that have reopened have done so with optional participation.

Even Google, one of the most vocal companies in tech when it comes to bringing staff back to the office, has pulled back. The workers opposed the demands, citing the record profit the company generated last year. Management said it has approved 85% of requests for relocation or permanent remote work.

“I haven’t been able to make a deal”

Tech companies with long leases are feeling the pain, as commercial real estate properties in San Francisco have fallen on average between 30% and 40% below pre-pandemic prices, market experts said.

Global logistics company Flexport, which has a head office on Market Street that once had 500 employees, has been unable to find a tenant to lease the space for more than two years.

“We have had our office listed through CBRE for sublease throughout the pandemic, but due to increased inventory and fierce competition in the sublease market, we have not been able to close a deal,” Bill Hansen, global head of real Flexport companies. wealth, said in an interview.

Flexport founder and CEO Ryan Petersen previously told CNBC that the company could not find anyone to take over the office. He attached a sad face emoji to his message and said: “The space is great – we just signed high rates and the market was very soft through Covid.”

In downtown Rincon Center, where Twilio is located, the food court has been almost entirely removed, save for a few longtime tenants. Across the street at One Market Plaza, Mediterranean restaurant Cafe Elena is the only vendor open. The lights remain off in the other five as they have been since March 2020. One Market is home to Autodesk, several floors of Google offices and CNBC’s San Francisco studio.

“Everybody is losing — it’s just a matter of how much,” said Colin Yasukochi, who heads CBRE’s Tech Insights Center.

The Salesforce Tower, left, and the Salesforce West office building in San Francisco, California, US, on Tuesday, February 23, 2021.

David Paul Morris | Bloomberg | Getty Images

There is another side to the San Francisco real estate picture. High-end spaces are seeing record prices.

Last year, Salesforce listed space in its East tower, which Yelp and Sephora subleased from the company. Terms were not disclosed, but real estate experts say they were expensive deals. In May, the Sobrato organization paid $71 million for a building in San Francisco’s South of Market neighborhood, setting a record at over $1,700 per square foot.

Cushman and Wakefield’s Sammons said employers know they will need to offer more incentives for workers to return and that “it can’t just be a snack bar anymore.” They are transacting now to prepare for that kind of future.

“We’ve seen some really big deals and the big tech companies are taking advantage of the market and realizing that they’re more comfortable going back to the office part-time and you’re going to need it on the road,” Sammons said. . “They are the kind of companies that have the funds ready to do that.”

Waiting and hoping for recovery

Analysts at Wells Fargo and others expect the downtown real estate market to rebound sharply in 2024 and 2025. But there’s no guarantee that San Francisco and surrounding cities in the East Bay and Silicon Valley will fully recover.

Home prices are still near the highest in the country and now interest rates are jumping, making multi-million dollar mortgages even more expensive.

“With no solution to the region’s affordable housing crisis in sight, local firms will have a hard time convincing graduates to stay in the region,” Wells Fargo analysts wrote in a report this month titled, “What Will What’s next for San Francisco’s economy?”

“The return of the tech sector’s Gold Rush fever and persuading workers from other areas to relocate to the Bay Area will be even more challenging,” the analysts wrote. However, “while many companies have expanded or even moved out of the region. , the Bay Area still possesses the most complete technology ecosystem in the world,” they said.

Mayor Breed, who recently proposed a $14 billion annual budget for fiscal year 2022-23, recognizes that the world of work has changed. She is banking on San Francisco’s cultural and tourism appeal to help with a revival.

“Our concerts, our activities, our conventions, a lot of things that people would want to visit a big city for are what we need to focus on,” she told CNBC. “Working in an office will just be an adjustment for change.”

The market faces additional potential turmoil as real estate contracts expire in the next year or so. Landlords are likely to be forced to offer better terms to tenants who are considering moving out or at least downsizing, experts said.

Some small businesses have created revenue-sharing arrangements with owners to ease start-up costs and spread risk. Some are discussing sharing spaces with other tenants in ways that have “never been done before,” Sammons said, calling it “a whole new world in some ways.”

At Luck’s clinic, business is running rough. He has had to cut his staff and rely on loans he said he will pay off “probably for the rest of my life.”

But Luck said he’s seen it several times before and expects history to repeat itself.

“I’ve been through the dot-com bust and the housing bubble,” he said. “Recessions happen and they also recover, eventually. My hope is that in four to five years, it could be a more diverse population of businesses.”

— CNBC’s Yasmin Khorram contributed to this report

WATCH: CNBC’s one-on-one interview with San Francisco Mayor London Breed

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