Regardless of political leanings, this fall's presidential election is seen as a critical juncture for the U.S. In San Francisco, so are local elections. The city's voters, including those in the once-thriving but pandemic-hit commercial real estate industry, are watching the mayoral race with particular intensity because of the number of candidates and expectations for how things will play out once the votes are counted.
“We're hearing rejection of the status quo from the real estate industry and from voters alike,” said Jay Chen, executive director of Neighbors for a Better San Francisco, a local political group whose donors include billionaires and real estate moguls like Nick Podell and Brandon Shorenstein. “I think the level of real estate engagement at the local level this year is unmatched.”
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In addition to the mayoral race, which features five major candidates, including incumbent London Breed, six seats on the city's 11-member Board of Supervisors, the city's legislative body, are up for election, with three of them vacant. The potential to shape city leadership and leverage involvement during a critical presidential campaign are likely to attract big donations this year, as many believe even a more moderate board could mean big change in a long-progressive city.
Real estate and tech industry money is expected to push for more moderate leadership this fall in the form of a collection of political action committees such as Neighbors for a Better San Francisco and Together SF. Chen said he expects the group to be actively involved. The group has already put $950,000 into a ballot initiative called the “Dysfunctional Bureaucracy Reduction Initiative” to cut the number of city commissions in half from 130 to 65, in an effort to eliminate municipal bureaucracy, a real estate priority.
The issues at the center of most political debates in San Francisco, and the concerns of most voters — housing and homelessness, downtown vitality, and public safety — also tend to be the top concerns driving commercial real estate. Those concerns include business-friendly tax reform. One ballot measure voters will evaluate this fall would cut taxes for 2,500 small businesses in the city by raising the tax-exemption threshold.
“I've lived in this city for 25 years, and this is the first time I've seen nearly every policymaker, incumbent and running, moving in the right direction,” said Justin Shapiro, co-founder and president of Long Market Property Partners. “The whole point of this election, I think, is to find a candidate with the experience to actually put these ideas into action.”
San Francisco, and its developers, owners, and other real estate players, are right to feel like they're on the edge: Since the pandemic began, the city's reputation has been tarnished, fairly or not, by concerns about public safety, comments about the city's doom, and a record number of vacant office spaces (more than a third were vacant as of this spring).
“This is important because the actual capital, the bankers and lenders are often not in San Francisco,” said Corey Smith, executive director of the Housing Action Coalition, a Bay Area nonprofit focused on building housing. “That's why it's so important to push back, and why the city's decline has been so exaggerated.”
Cyrus Sanandaj, founder and managing principal of Presidio Bay, hopes the election will lead to more moderate policies to address important issues such as public safety, crime, homelessness, the drug crisis and the housing crisis. He also believes the city needs to address bureaucratic corruption and waste, emphasize the need to create a more business-friendly environment and correct past permissive progressive policies.
“I think those in charge have a very big responsibility to foster innovation, investment and job creation,” Sanandaji said. “They should be nurturing the golden eggs that support 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 race so far, with Breed running against progressive San Francisco City Council Speaker Aaron Peskin, former interim Mayor Mark Farrell, City Council Member Ayesha Safai and Daniel Lurie, a nonprofit executive and Levi Strauss fortune heir who describes himself as an outsider.
One reason this election remains so important is because the city's success depends on its downtown, Chen argues, not just for attracting businesses but also for its tax base. The city's high-tax environment has even been said to encourage remote work, sparking regular complaints from business leaders and developers. A number of recently passed voter initiatives also make San Francisco's business tax structure relatively high compared to other U.S. cities, said Sujata Srivastava, chief policy officer at urban think tank SPUR.
Some point to taxes like 2018's Proposition C as one measure that would hurt commercial property, which imposed a tax on commercial property rent for landlords with more than $1 million in annual gross receipts to fund child care and early childhood education.
California, and specifically San Francisco, led the nation in commercial real estate foreclosures last year, according to data platform Atom. In recent months, many properties have traded for a fraction of their previous value. For example, the office building 55 New Montgomery, previously valued at $71.4 million, is now trading for $15 million. This suggests the market has bottomed out and is headed for a realignment.
Chen's group is pushing for tax incentives to lure businesses to downtown, tax credits to force them back to the office and lower taxes across the board, aiming to “send a different message to the investor community, to tenants, to property owners and to people who want to invest here.”
Srivastava argues that a different strategy is needed to revitalize downtown. For example, Mayor Breed has made a number of proposals to bring graduate schools to downtown, asking the University of California to open a satellite campus downtown, and inviting historically black universities to open satellite campuses in the city. Both proposals would utilize vacant hotel and office real estate to boost economic activity in central San Francisco.
Tax reform, especially high transfer taxes, has been a headache for the industry. Many reforms have been proposed to mitigate the effects of tax reform, including changes to payroll taxes and executive bonus taxes. Shapiro highlighted the so-called Twitter tax, a property tax exemption zone that created incentives for social media companies and technology companies such as Square to locate offices downtown and spurred the construction of hotels, offices and apartments, as an example of a policy that would encourage growth and investment.
Rising housing and home prices have also long been an unresolved issue due to a huge production shortage and complex rules and regulations, which many developers say are preventing multifamily development.
“There are so many interest groups with so many agendas that it all ends up getting bogged down,” said a local real estate leader, “and I think that's the biggest problem facing San Francisco when it comes to housing and development. The people who are in government and running the political system don't understand supply and demand.”
San Francisco voters in March passed a measure that eliminates transfer taxes on up to 5 million square feet of office-to-residential conversions. The measure also gives the Board of Supervisors the power to waive transfer taxes without putting the decision to voters. But many in the real estate industry want more incentives to make such projects profitable, Srivastava said.
The Housing Action Committee supports Mayor Breed in her efforts to increase housing construction, including shortening cumbersome environmental reviews, speeding up the city's permitting process and supporting proposals to encourage office-to-residential conversions. These are all efforts to “make a difference,” Smith said. Breed is “an urbanist mayor who understands housing at all levels,” he said. Peskin, meanwhile, has opposed housing construction for decades and is “definitely” a NIMBY candidate, Smith said.
Peskin's campaign responded to Commercial Observer with a statement defending his record of voting in favor of more than 100,000 new homes, saying, “He is the only candidate with a concrete plan to build middle-class housing.”
Land use policy will be a key differentiator in this election, Srivastava said. San Francisco is zoned for 82,000 new housing units over the next eight years due to state housing goals, meaning many low-density, affluent neighborhoods are likely to be included in the plan. Pushing for more housing, especially affordable housing, will be key to meeting those requirements and spurring growth, she argued. In an election themed on economic revitalization, efforts toward expanding multifamily development and opportunity fit into a larger narrative.
“We need to create opportunities for low- and moderate-income residents,” she said, “or we start limiting economic growth.”