The metropolitan regions of Los Angeles and San Francisco are vastly different, but face some similar challenges as they emerge from the post-pandemic social framework.
Those challenges include lost ridership on both cities transit systems, vacancies in commercial real estate and balancing budgets as COVID-19 recovery money peels off.
The challenges faced by the regions — along with all of the market and economic variables playing out nationally — have shown up in debt priced by the City and County of San Francisco and Los Angeles County in some deals done over the past 12 months.
Los Angeles County priced two lease revenue deals weeks apart in August. They both carried AA-plus ratings.
The deals were similar enough that more of an apples-to-apples comparison could be drawn than is normally possible, said Daniel Wiles, the county's treasurer-tax collector.
Barclays on Aug. 7 priced for Los Angeles County Facilities 2 Inc. $212.135 million of lease revenue bonds for the tax-exempt portion to yield from 2.43% for the June 2029 maturity to 3.83% for the 2057. The 10-year yielded 2.58%.
On Aug. 22, BofA Securities priced for Los Angeles County Public Works Financing Authority $569.27 million of lease revenue bonds to yield from 2.55% for the December 2024 maturity to 4.14% for the 2053. The 10-year yielded 2.68%.
Wiles said the county didn't notice a difference year-to-year when it sold its annual tax and revenue anticipation note in June. This year's came in a bit higher than in 2023, but last year there was the potential for a government shutdown when they sold, he said.
"This year's TRAN was coming at a time that wasn't quite as turbulent," he said.
The two lease revenue bonds experienced differences, because, Wiles said, there has been enough volatility that the market environment in the second week of August was different from the fourth week of August.
Wiles was drawing comparisons in response to a question about how headline risk — like homelessness in the county or the violent crimes on transit — can affect bond sales.
Generally, such issues don't affect sales, he said, because the Los Angeles County is so diverse and so vast — it has 9.7 million residents, more than 40 states. Commercial real estate isn't a hinge-point for the county, he said, with its large rural swathes with a larger concentration of residential housing.
That said, "How your issue is received can be affected by the news of the day, and it's been even more so, recently," Wiles said.
Nationally, most cities and counties are experiencing challenges from commercial real estate vacancies amid the hybrid work phenomena that began after COVID-19 forced people to stay home. More than four years later, the return to the office anticipated by market watchers has failed to materialize in many cases.
The credit quality for U.S. cities continues to hold up despite challenges from commercial real estate markets, S&P Global Ratings analysts wrote in an April report.
The medium term credit outlook is marked by elevated economic and budgetary uncertainty, but these "challenges are not likely to be overwhelming or lead to significantly elevated negative rating bias," S&P analysts wrote.
"We expect cities to see sluggish revenue growth in the coming few years, rather than precipitous cliffs from falling tax collections tied to commercial real estate (CRE), and we have widely observed residential valuations supporting tax base stability even in cities seeing CRE values decline," S&P analysts wrote.
Because commercial real estate buildings have longer-term leases, and companies who have vacant space have to continue to pay those leases, the risk hasn't entirely shown up for CRE owners, or in CRE property taxes; though retail revenues have taken a hit, Cure said.
San Francisco's tech layoffs, though widely written about, haven't seemed to have impacted the unemployment rate of the city, or the state.
In San Francisco, tech companies revealed plans to cut over 7,000 jobs in April through June, according to a compilation of notices sent to employees by the Mercury News.
Economists from Beacon and UCLA Anderson Forecast had previously told The Bond Buyer that the unemployment numbers weren't bumping up, because tech workers' skills are in such high demand in the Bay Area that if laid off, they tend to find a new jobs rather quickly with a different company.
California's unemployment rate held steady at 5.2% in July, unchanged from the previous month, but no longer the highest in the nation, according to a report from Beacon Economics.
"There's some good news for California in these numbers, the state has overtaken Texas in terms of the number of jobs added over the last year and no longer has the highest unemployment rate in the country," said Justin Niakamal, manager of regional research at Beacon Economics. "The bad news is that the Bay Area, and San Francisco in particular, continues to underperform inland parts of state."
California continues to struggle with its labor supply, however.
Although the state's labor force grew by 15,100 in the latest numbers, since February 2000, it has fallen by 230,700 workers, a 1.2% decline, according to Beacon.
"This is being driven largely by California's housing shortage and by the retirement of aging workers," Beacon wrote.
"I have heard people speculate that the availability of federal money (through COVID-19 recovery funds) would reduce capital borrowing," said David Brodsly, a managing director with KNN Public Finance, though the latter hasn't really shown up. "But I haven't really seen that."
The San Francisco Bay Area Rapid Transit District had long depended on farebox recovery, and its finances reflect that reality not that ridership is down; post-COVID-19, the system is struggling, said Howard Cure, partner and director of Municipal Bond Research for Evercore Wealth Management.
In juxtaposition, Los Angeles County Metropolitan Transportation Authority is not farebox dependent; the bulk of its funding comes from sales tax, Cure said.
But the fear of crime on Los Angeles Metro appear to be greater issue in recent months; and the city is pushing to build out its rail network ahead of the 2028 Olympics and Paralympic Games.
Metro's board recently approved ending its long-time contracts with the Los Angeles County Sheriff's Department and the Los Angeles Police Department in favor of starting its own police department.
Combined with transit problems, both cities face challenges around affordable housing and homelessness; and their commercial real estate markets are struggling as they adapt to the reality of hybrid work schedules.
When the U.S. Supreme Court ruling came down that cleared the way for cities to clear homeless encampments without proving they have enough housing for displaced residents, the two big city mayors took opposing views.
Los Angeles Mayor Karen Bass came out squarely in opposition to the decision, expressing concerns that it could result in the 87 other cities in Los Angeles County pushing homeless people into the City of Angeles, negating the progress the city has made toward reducing homelessness.
San Francisco Mayor London Breed lauded the decision as one that would remove obstacles to reducing homelessness there.
Though the state's twin housing and homelessness crises have taken center stage in recent years, the state, and its major cities, are not immune to economic factors facing the rest of the country, such as inflation and higher interest rates.
San Francisco's challenges include headline-grabbing criminal incidents, most recently last week's shooting of a San Francisco 49ers player in the heart of the city at Union Square, and fiscal concerns that resulted in Moody's Ratings
