In San Francisco’s Elections, Commercial Real Estate’s Future Is on the Ballot
The industry has favored candidates as it tries to boost policies that will rejuvenate the city’s downtown
By Patrick Sisson July 16, 2024 8:00 am
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Regardless of political persuasion, the fall presidential election is viewed as a critical crossroads for the United States. In San Francisco, the same holds for local elections. The city’s electorate — including those in its once thriving commercial real estate industry, battered as it was by the pandemic — are following the mayoral race particularly closely given the number of candidates and the expectations for what might happen after the votes are counted.
“From both the real estate industry, and the voters, you hear a rejection of the status quo,” said Jay Cheng, executive director of Neighbors for a Better San Francisco, a local political group that counts billionaires and big real estate players such as Nick Podell and Brandon Shorenstein among its donors. “I think it’s unique, the level of real estate engagement on the local level this year.”
In addition to the mayoral race, which features five main competitors including incumbent London Breed, six spots on the 11-member Board of Supervisors, the city’s legislative body, are up for election, including three open seats. The potential to shape the city’s leadership — and tap into engagement during a critical presidential election cycle — means this year will likely see significant donations, as many believe even just a more moderate board in a long-progressive city would lead to substantial change.
Real estate and tech money, in the form of a constellation of political action committees like Neighbors for a Better San Francisco and TogetherSF, is expected to push for that more moderate leadership this fall. Cheng said his group expects to be very involved. It’s already pumped $950,000 into a ballot initiative, called the “Cut the Dysfunctional Bureaucracy Initiative,” to halve the number of city commissions, from 130 to 65, in a bid to eliminate municipal red tape, a real estate priority.
The issues at the center of most San Francisco political debates, and most voters’ concerns — housing and homelessness, downtown vitality and public safety — also tend to be top concerns animating commercial real estate. Those concerns include business-friendly tax reforms. One ballot measure voters will evaluate this fall would reduce taxes on 2,500 small businesses in the city by increasing the threshold for a tax exemption.
“In my 25 years being in the city, this is the first time that I’ve seen pretty much every policymaker, whether in office or running for office, swimming in the right direction,” said Justin Shapiro, co-founder and principal of Long Market Property Partners. “The point of this election, in my mind, is finding the candidate who is going to have the experience to actually implement these ideas.”
It’s fitting that San Francisco — and local developers, owners and other real estate figures — would feel they are perched on a precipice. The city’s reputation since the pandemic, fairly or not, has been tarnished by public safety concerns, urban doom loop commentary, and record-setting amounts of empty office space (more than a third vacant as of this spring).
“It matters because oftentimes the actual capital itself, the bankers and the lenders, aren’t in San Francisco,” said Corey Smith, executive director of the Housing Action Coalition, a Bay Area nonprofit focused on housing production. “That’s why it’s crucial to push back, and why the demise of San Francisco has been greatly exaggerated.”
Cyrus Sanandaji, founder and managing principal of Presidio Bay, is hopeful that the election will lead to more moderate policies to tackle critical issues such as public safety, crime, homelessness, drug problems and the housing crisis. He also emphasized the need to address bureaucratic corruption and waste, and to create a more business-friendly environment, which he believes are necessary corrections to previous permissive progressive policies.
“I think that the people in charge have a very, very significant responsibility to foster innovation, investment, and job creation,” Sanandaji said. “They should nurture the golden goose that sustains the city’s budget.”
The strength (or weakness) of the city’s real estate sector has been one of the central focuses of the mayoral campaigns this far, which pits Breed against progressive San Francisco Board of Supervisors President Aaron Peskin, former interim Mayor Mark Farrell, Supervisor Ahsha Safai, and Daniel Lurie, a nonprofit exec, heir to the Levi Strauss fortune, and self-declared outsider.
One reason this election remains so critical is that the city’s success hinges on the downtown, Cheng argues, not just for business attraction but for its tax base. The city’s high-tax environment, which some have said even encourages remote work, leads to regular complaints from business leaders and developers. A number of recently passed voter initiatives, too, has created a relatively high business tax structure in San Francisco compared to other cities in the country, said Sujata Srivastava, chief policy officer of the urbanist think tank SPUR.
Others have pointed to taxes like 2018’s Prop C, which placed a tax on the lease of commercial property for landlords with annual gross receipts over $1 million to fund child care and early education, as one of those measures that harms commercial real estate.
According to data platform Attom, California — and San Francisco in particular — led the nation in commercial foreclosures last year. In recent months, a number of properties have traded for fractions of their former worth — like 55 New Montgomery, an office building formerly valued at $71.4 million yet trading for $15 million — suggesting a market hitting bottom and hopefully recalibrating.
Cheng’s group is pushing for tax incentives to bring business downtown, tax credits for mandating a return to office, and lower tax rates in general, in a bid to “send different signals to the investor community, tenants, property owners and people who want to invest here.”
Srivastava argues that different strategies will be needed to revitalize downtown. Mayor Breed, for instance, has made a number of proposals to bring graduate schools downtown, including asking the University of California system to open a satellite campus downtown and bringing a historically Black college or university satellite campus to the city. Both ideas would leverage available and vacant hotel and office property and to create more economic activity in San Francisco’s core.
Tax reform has been a thorn in the industry’s side, especially the high transfer tax. A number of changes to ease its impact have been proposed, including altering payroll and executive bonus taxes. Shapiro highlighted the property tax exclusion zone, the so-called Twitter tax — which created incentives for tech firms like the social media company and Square to locate offices downtown and drive the construction of hotels, offices and apartments — as an example of policy driving growth and investment.
Housing and affordability also remain a long-simmering, unresolved issue, due to a significant lack of production and a thicket of rules and regulations, which many developers say hampers multifamily development.
“You have too many special interest groups with too many agendas, and it ends up bogging everything down,” said a leader of a local brokerage. “And that is the biggest problem San Francisco faces as it relates to housing and development, in my opinion. The people that are in our government and run our political system do not understand supply and demand.”
San Francisco voters passed an initiative in March to remove the transfer tax on up to 5 million square feet of office-to-residential conversions. The initiative also empowers the Board of Supervisors to waive the transfer tax without having to take the decision to voters. Many in the real estate industry would like to see more incentives to make such projects pencil out, though, said Srivastava.
The Housing Action Committee is backing Breed because of her efforts to increase housing production, including pushing to shorten onerous environmental reviews, speeding up city permitting, and supporting a proposition to incentivize office-to-residential conversions — all efforts to “try and move the needle,” according to Smith. Breed is “an urbanist mayor who understands housing at every level,” he said. Peskin, on the other hand, has decades of opposition to building more housing, said Smith, and is “unquestioningly” the NIMBY candidate.
Peskin’s campaign responded to Commercial Observer with a statement that defended his record of voting to approve over 100,000 new homes, saying he was “the only candidate with a concrete plan to build middle-class housing.”
Land use policies will be a key differentiator in this election, said Srivastava. San Francisco is mandated by state housing goals to zone for 82,000 new housing units over the next eight years, which means many low-density, affluent areas will likely need to be included in any plan. Pushing for more housing, especially affordable housing, will be key to meeting these requirements and helping catalyze growth, she argued. In an election centered on the theme of kick-starting the economy, efforts to develop more multifamily and expand opportunity fit a larger narrative then.
“You need to create opportunities for low- and middle-income residents,” she said. “Otherwise, you start to constrain how much the economy can grow.”
