Transcription:
Mike Scarchilli (00:05):
Hi everyone and welcome to the Bond Buyer podcast, your essential resource for insights into the world of public finance and municipal market trends. I'm Mike Scarchilli, editor in chief of the Bond Buyer, and today we're revisiting a critical conversation about the economic and financial challenges facing the San Francisco Bay Area and Oakland, our senior reporter in the far west region. Keeley Webster speaks with Chris Thornberg, founding partner at Beacon Economics and Marc Joffe, a longtime public policy analyst with extensive experience in California to explore the ongoing struggles of San Francisco's commercial real estate market, the impacts of tech layoffs and the broader economic headwinds weighing on the region. They also turn their focus to Oakland where fiscal distress and governance turmoil have raised concerns about a potential Chapter nine bankruptcy. Chris and Marc provide a deep dive into the key issues at play from the long-term effects of hybrid work policies and declining labor force participation to the challenges of housing shortages and tax policy decisions. They also possible solutions such as zoning reform, infrastructure investments, and strategic economic policies that could help stabilize these city's financial futures. So without further ado, let's jump into this timely discussion.
Keeley Webster (01:31):
Hello Chris and Marc. We are revisiting a podcast conversation we had in 2023 when the San Francisco Bay area was struggling amid hybrid return to work policies coming out of the pandemic and challenges from the transformation in the tech industry, and also to discuss how neighboring Oakland is faring with leadership lapses. In talk of chapter nine, bankruptcy, San Francisco has experienced tech layoffs and result in commercial real estate vacancies, which have hurt the city's coffers. Additionally, the city faces a housing crisis and drug epidemic and widespread retail theft problems have resulted in the loss of anchor stores like Nordstrom and Bloomingdale's. So let's break down some of the issues beginning with San Francisco having one of the lowest rates of employees returning to a five day in-person work week. How much is that a factor in the city's ability to recover? So first, Chris, if you could respond to that.
Chris Thornberg (02:24):
Well, when we think about San Francisco or in general what's happening in the West Bay, we continue obviously to worry about those empty office buildings and there's a lot of vacancies in San Francisco and San Jose of course, and with that, some of those really what I would call center city districts are still struggling to come back. We know, for example, market Street in San Francisco is still really quite empty and quiet, which is not good for the overall look of the city. With that said, I think we need to take a step back because what often happens is we let what's happening in a couple neighborhoods impact our vision of what's happening in the overall economy overall. The San Francisco economy is still one of the tin zip codes, if you will, in the entire nation. Some of the highest incomes still getting a tremendous amount of venture capital money.
(03:18):
Unemployment rates are still relatively low, running about 4%. So overall, at least from an external macro economist standpoint, this is still a region that seems to be successful from my perspective. There's two real issues here in the Bay Area that need to be thinking about, and one is this tech sort of collapse. Collapse is a strong word, the tech downturn we've seen where they lost about 60,000 jobs in the region over the course of the last couple of years. And then of course there's the broader issue having to do with housing shortages. And I know it seems odd to talk about an economy that seems to be slowing down and housing shortages in the same breath, but believe it or not, these are highly related with each other and in a very real sense, going back to your first question, which is about these neighborhoods which are struggling, there is that broader conversation.
(04:12):
How does that all fit together? Look, ultimately the Bay area's biggest issue is the fact that their labor force has been declining over the course of the last five years. And in an area that has a declining number of potential workers, it's hard to see a lot of economic upside. And what you really need in the Bay Area right now is some of that economic upside in order to repopulate these areas that have been emptied out because of people working from home. And I don't actually see the region leaning in on that particular issue. They continue to be consumed what I would call the more narrow issues about what's happening specifically within these neighborhoods. They need to be looking at the bigger picture.
Keeley Webster (04:58):
So what's your take on that, mark?
Marc Joffe (05:01):
Well, I'd add a couple of things. As a Bay Area resident, I absolutely agree that the problem is confined to a couple of discrete neighborhoods. The downtown Market Street, south of market area in San Francisco, downtown San Jose has been quiet for a long time and continues to be so, but if you go into outer parts of San Francisco, it's very vibrant. There's an area called the Stonestown Galleria, which is an alternative shopping mall to the San Francisco Center, which is on Market Street, and that's bustling with very high occupancy and lots of customers. So it really is a story of different neighborhoods experiencing different issues. As far as Chris's macro points are concerned, I think it's going to be very hard for the Bay Area to build an amount of housing that the state would like it to because the Bay Area is very focused on infill development, and infill development is extremely controversial. There's a lot of resistance to suburban sprawl. So you'd see how say Austin, for example, is dealing with their earlier shortage of housing, which has really disappeared. They just keep building in the outer rings of the area. That doesn't happen in the Bay Area because we've taken a lot of land offline.
Keeley Webster (06:31):
So this contradiction between the fact that there continues to be a low unemployment rate, while we're seeing there's a lot of talk about the tech exodus, how are those things, what's the interplay there? How is it the unemployment rate continues to be low when again, there have been layoffs in the tech industry? Where does the rubber meet the road on that?
Chris Thornberg (06:55):
It starts with, well, a concept in economics known as Dutch disease, and the idea of Dutch disease all comes from the Netherlands. Back in the 1950s, in the 1950s, the Netherlands had one of the strongest manufacturing bases in Europe, and then lo and behold, they discovered oil in the North Sea and all those strapping young men who were working in the factories went out in the oil rigs That caused a complete collapse in the manufacturing industry. And when oil prices went down, the Netherlands suddenly found itself without any kind of backstop in the economy dropped with it. In a very real sense, that's what's happening in the Bay Area. The issues with tech are largely short term. Look, there was a huge increase in demand for social media in a huge flow of venture capital into the region in 20 21, 20 22, that all faded away as the economy and our world got back to normal post pandemic and that led to a slump in the Bay Area.
(07:53):
Now, keep something in mind that tech had been expanding prior to that at the expense of every other part of the Bay Area economy. We know that back office operations are fleeing the area because you can't afford to operate there. A lot of lower end service businesses just can't afford to operate there, and they've been leaving as well. Well, as soon as you saw a subsidence in tech, all these other industries started hiring like crazy. Particularly healthcare. Healthcare has picked up tons of employees over the course of the last couple years, finally able to catch up because tech has taken a breath. Now tech is at the bottom, money's starting to come back in. We know tech continues to go to the Bay Area. There's a whole new surge of demand to be there because of ai. But again, I go back to the idea, what are we more worried about is the loss of 60,000 tech jobs over the course of the last couple of years or 150,000 workers over the last five years.
(08:50):
For me, I'm far more concerned about the latter impact because that's what's creating the overall Dutch disease. Look, the Bay Area wants to continue to be the center of the tech world. They have to start leaning in to expand their housing stock to allow the labor force to grow. Again, I couldn't agree more with Marc. Look, you can't go farther in the suburbs in the Bay Area because you already have the massive traffic problems. It's a very hard place to get around given the fact that you have this massive urban area with a giant body of water in the middle of it, which makes it complicated. The argument absolutely has to be infill, and the region has absolutely failed to do that on the resistances profound. But everybody in the Bay Area has to understand that resistance is exactly why their economy is having all these weird problems.
(09:41):
Like you said, you can't hire anybody, even though of course tech is subsiding what's going on here? For me, it's interesting because really what the boils down to here is yes, there's some problems in neighborhoods. Marc nailed it. Exactly right. What they should be doing in these neighborhoods is thinking about redoing the plans to allow for some serious housing densification. Why not go into Market Street? Why not go into some of these places where there's a bunch of old homeless, completely empty office buildings and just redo it? Just go in heavy, have an urban rebuilding plan. We've seen this game before many times in history. We've had local governments in these cities who've taken a particular specific center, reimagine it, rezoned it, and built something amazing. I, for example, thinking of the Civic Center in Bunker Hill here in Los Angeles, we need that kind of big thinking to help the Bay Area lean in and overcome this stuff. And again, they're so consumed with what I would call these smaller, more local issues that nobody's there to have that big picture view that needs to happen.
Keeley Webster (10:46):
Okay, so now we're going to pause a moment for a commercial break and we are back. So the rating agencies, Moody's and s and p both downgraded the city's go bonds and the city has a $290 million deficit in the current fiscal year, and the city controllers projected it could exceed 1 billion in the next few years. Given what's going on in some of these challenges, mark, what do you think the city needs to do to close the deficit? What is going tos going to result in the kind of economic growth that allows the city to recover?
Marc Joffe (11:29):
Well, if I get started, I'd like to plug into one of the points that Chris made, and I don't have a crystal ball, but I have concerns about the thought that maybe the tech employment will bounce back like it did after the.com crash. This fundamentally goes into what the revenue picture is going to look like. The fundamental question is what is the impact of AI going to be? Now, obviously there are AI startups that are creating jobs, but on the other hand, AI is making programmers much more productive. And so you're seeing a lot of the bigger employers like Salesforce reduce hiring. In fact, I think they're really having a hiring freeze in 2025. I think meta is the same way. So if in fact there's actually less need for programmers, you will not see tech employment bounce back. Even though the tech industry itself as a whole venture capital investment and so forth may bounce back. That could mean that companies or cities that are more dependent on property tax and sales tax revenue may not see a revenue rebound. And as a result, the focus is really going to have to be on cost cutting, which is very difficult for San Francisco and other Bay Area cities because people like a big robust government, there are public employee unions, management staff and so forth that like to see continued spending. And so it's going to be very challenging if I'm correct about the revenue not bouncing back.
Keeley Webster (13:07):
So Chris, you mentioned healthcare as a bright spot in everything going on. Is there enough growth in healthcare to replace some of the lapses in tech right now and how is that playing out in San Francisco exactly?
Chris Thornberg (13:24):
Well, yes, I mean is the answer because again, unemployment rates have drifted up a little bit, but very little. What I meant by tech and Marc, your point was well made is tech is hit bottom, things are starting to regather. But again, if it's going to continue to grow in the Bay Area, who are they going to hire right now? It's still a fight for any kind of particularly qualified employee. Again, the way San Francisco can rebuild its financial base is by refilling those offices and the way they can refill those offices is largely through yet again leaning in to infill housing development. Now, there is some precedent for this. It's interesting about a little less than a decade ago, really after the great recession, there was a brief period of time where there was a bunch of new units built in San Francisco that has faded.
(14:16):
The number of permits being pulled right now is down significantly from where they were eight, nine years ago. It's obviously remarkably difficult to build in San Francisco, really anywhere in the Bay Area. There's tons of rules, tons of regulations, tons of permit costs. They've really regulated themselves right out of a housing development market. And these are the consequences. The tech wants to continue to be in the Bay Area, but the Bay Area won't allow it to grow there. And therein lies the problem. Now again, when there's a little slump in tech, other parts of the economy can catch up a bit, but now the tech is balanced out again, what happens next? Well, tech could grow, but only at the expense of something else such as healthcare. And guess what? People need those offices filled, but they also need to have a doctor available to 'em. The way to balance that, and I hate to be repetitive, but yeah, we need housing and they're not leaning in on that.
Marc Joffe (15:18):
I just want to double down on the point that I made a little earlier, Chris. I think with AI potentially radically increasing programmer productivity and also something I didn't mention before, this move towards ag agentic technology, which means that instead of going into an app, you just talk into your phone and say, I want you to do this, means there are going to be less user interfaces, less apps, less websites. It could simply be that we have passed the peak of tech employment and regardless of whether tech companies make more or less money, they're just never going to hire more programmers than they had in 2022.
Chris Thornberg (16:00):
That's very possible. But then again, we've heard stories of peak technology before and they always seem to find something else to focus their energy on.
Marc Joffe (16:11):
That's true. I recall the whole discussion about robo taxis all the way back like in 2017 and how all taxi drivers, whether it be unemployed, and it turned out that it didn't happen, although now in San Francisco you do have Waymo starting. So sometimes these kind of tech forecasts like the ones that I'm making are over aggressive and they take many, many years to materialize.
Keeley Webster (16:36):
So Chris, can you share with us what you were referencing in terms of healthcare? What specifically is happening with healthcare growth? And I mean you talked about doctor's offices and that sort of thing, but I mean are there major hospitals located in San Francisco or what specifically is going on there in terms of healthcare?
Chris Thornberg (17:01):
Well, I'm looking really at the overall Bay Area economy, not just San Francisco. Remember, San Francisco County is a relatively, while it's obviously everybody thinks of San Francisco Bay, they think of the city of San Francisco, but it's less than a million people and of course in overall region of over 7 million people. So it actually is not a big part of, if you will, as big of a part of that local economy as you might think now in terms of those healthcare jobs, some of those in San Francisco, but a whole bunch in the East Bay. Remember a lot of the people who work in San Francisco, even if it's only a couple days a week typically tend to live in the East Bay. We understand the kind of commuting flows that go back and forth. And again, I go back to the idea that a little bit of loosening up in the tech sector simply allowed really healthcare.
(17:49):
It's not like there's a lot of growth. It's more like there were a lot of job openings and they found me have an opportunity to catch up a bit because again, there's a breather in that tech sector, but this is not what any kind of economy wants. You don't want your different industries to be competing desperately over any kind of available skilled worker. You need to have a place that can allow all these sectors to grow rather than compete with each other. Unfortunately, right now, the Bay area's labor force is approximately where it was back in 2017. So they really are going in the wrong direction at this particular point in time. And the only thing they're going to be able to do to get through this problem is to really seriously rethink local zoning.
Keeley Webster (18:34):
Have the economic challenges affected housing or commercial real estate prices in the Bay Area or are they still as high as they've always been?
Chris Thornberg (18:44):
Well, it's interesting you should say that. If you take a look at some of the data, yes, there's been a big increase in vacancies, there's no doubt about it, but rents really haven't fallen off as much as you might think. Now keep in mind what I'm looking at, what I'm looking at is a sort conglomeration of asking rents from a variety of places. And here's the key. It isn't as if everybody's just fleeing the Bay Area, rather the industries, the companies, the corporations still operating there. Well, they're doing pretty well for themselves. Go back to the idea that you still have some of the highest income communities in the entire nation right there in that Bay area. What they're looking for is the good stuff. So you definitely see a flight to quality. So people may be renting less, but they want to rent nicer stuff, even if it's a smaller footprint overall.
(19:37):
This goes back to what I would call some of the big re-imagination that needs to go on. We all know that there's been this story in the Bay Area about how they need to convert office buildings into apartments. Well, there's a huge problem with that. First of all, there's not enough office buildings to turn into enough apartment buildings anytime in the near future. Equivalently, it's really hard. It's expensive. Turn in an office building into an apartment building. It's putting a square peg into a round hole at the best of times. And again, that's not what the Bay Area needs. My argument has been the idea that what they should be doing is going into some of these old office areas and not trying to convert anything. What they really need to be doing is just saying, Hey, look, we're going to back off. We do what if you get rid of this old office building? We'll give you BuyRight to build anything your little heart desires. Now, again, this is something for an economist, it's easy to say. I'm sure Marc is laughing right now because the actual chance of regulators in the pay area doing what I just said is functionally zero. But man, if people could understand that you could have that kind of big vision and really get some things accomplished, it could be a game changer in the Bay Area. But unfortunately, politics being what they are, we're all seen to be looking in the wrong direction.
Marc Joffe (20:59):
We do have a couple of projects that have been permitted in the area where market and Van Ness meat, which is a real central part of San Francisco, I think 40 plus story skyscrapers, and the developers can't put together the financing to build it because I think one reason for that is that condo prices in the downtown San Francisco area have come under a lot of pressure and in many cases are weighed down, and that's because of quality of life issues that we've referred to before. Another aspect is there's been big declines in commercial real estate valuations, which have some impact on the property tax revenues. As you can imagine, you've seen valuation appeals in the Union Square area of as much as 90% reduction in assessed value.
(21:54):
We've talked about at the opening the Bloomingdale's and Nordstrom closures that's in one mall called the San Francisco Center that is backed by commercial mortgage backed securities. And as things currently stand right now, all of those securities up to the AAA are going to take losses whenever that property is liquidated. It's already, it's been, I think two years since Westfield walked away and turned the keys over to CMBS bond holders. They haven't found anyone to buy it, and it looks like when somebody finally does buy it, it's going to be at a price lower than the size of the AAA tranche. So it just shows the massive markdown that's gone on. Again, in that one discrete area, you drive three or four miles away into the neighborhoods of San Francisco. That's not happening. But from a city finance point of view, that is very impactful to have such a loss of valuation among these very high value properties.
Keeley Webster (22:54):
So cities have always valued retail because they not only get properties taxes, but sells taxed by having retail. How does that affect the city from an income level mark to lose some of these anchor stores and potentially for this retail to go away?
Marc Joffe (23:16):
Well, sales tax revenue is definitely going to be down. Now, San Francisco, as far as I can understand, is not that sales tax dependent. Their sales tax is lower than a lot of neighboring cities in the Bay Area, so it may not have that big an impact on the total revenue. On the other hand, ancillary agencies like Bart that collect revenue from sales taxes across the Bay area may be impacted by that. On the other hand, if retail moves from San Francisco to San Mateo County or to Alameda County, then it also balances out for a multi-county agency like bart.
Keeley Webster (23:57):
So last week, Daniel Lurie a nonprofit executive in here to the leave heist, STRs Family Fortune was elected San Francisco mayor after campaigning on a platform to help change the city's trajectory, or I should say he was inaugurated last week. So Marc, any thoughts on what he might accomplish as a leader? Do you think he might have a better time implementing ideas that can change the trajectory?
Marc Joffe (24:27):
Well, it's been one step forward and two steps back for him so far. So we had the JP Morgan Healthcare Conference in downtown, and I think people were worried, are there going to be a lot of problems with crime, homeless people? Are we going to have another incident where healthcare executive gets assassinated? None of that happened. So it turned out that it was a very good conference. I understand that Jamie Diamond wants to come back in 2026, so that was a big win for Lori. I know that he put a lot of effort in presenting San Francisco well, but then in the last few days before we're recording this podcast, it was announced that Bloomingdale's was closing, and that's basically going to destroy what's left of the value of the San Francisco Center, which is really key property in downtown. And I don't think he has a good answer for that.
(25:20):
He took sort of a middle course in the campaign. I think he wants to try to help people who are on the street. I think from the point of view of getting the downtown reinvigorated, you simply have to figure out some way of getting these people off of the street. And that can be somewhat coercive following the Grant's Pass decision that we had last year. That once again allows cities to forcibly move people off of the streets. I think he may be reluctant to do that, and in that case, I don't think he'll be able to achieve what he would like, which is a reinvigoration of downtown.
Keeley Webster (25:57):
And Chris, what are your thoughts on Larry and his ability to lead the city in a different or in a growing direction, I guess?
Chris Thornberg (26:07):
Well, it's my understanding that the mayor of San Francisco, it's not unlike the mayor of Vale, it's that it's a relatively weak political position. They don't have a lot of leverage. It's more the city council that makes a lot of these calls. So in a very real sense, he's going to have to lead from the pulpit, if you will. He's going to have to be a visionary who really sells the vision and gets everybody behind him. Look, we've seen the emergence of, for example, mayor Mahan down in San Jose, which I think has brought a breath of fresh air to San Jose. You are starting to see a change in the conversation down there. I believe this can be an opportunity to see something the same in San Francisco. But look, San Francisco has always been a notoriously difficult place to get stuff done. It's only gotten worse in recent years.
(26:56):
And candidly, mark, I just want a little bit of a pushback on not being able to finance that apartment tower again, you go to Florida, go to Texas, there's all sorts of these places being built. It's not a fundamental inability to build. There's something else that's holding back these people who might otherwise invest in this. And my guess it's going to be permit fees, regulatory uncertainty, the fight with local planning boards. We all know how it shakes out. It could take a decade to get something actually done. And that seems to be, for me at least, where a lot of these issues, even making everybody use, they're incredibly high labor costs that are part of our prevailing wage system here in California. We make it unaffordable, and we can also be the ones to reverse that, but we have to acknowledge it. This is not something fundamentally handed to us. We really are our own worst enemy.
Marc Joffe (27:57):
I just like to say I would be the first person to advocate getting rid of prevailing wage. On the other hand, as I think you realize, it's not just not going to happen. The unions are just too powerful in San Francisco.
Chris Thornberg (28:10):
Understood, agreed.
Keeley Webster (28:12):
Okay. So turning to Oakland, the city's financial turmoil and turnover and leadership have resulted in the city's bond rating being downgraded to a, from AA minus by Fitch. The city chalked up a 79 million deficit for the current fiscal year and was looking at a $93 million deficit for fiscal 2025, and the city's financial lead was warning in November. If something didn't change, the city would have to declare chapter nine bankruptcy. So Chris, where is the city at right now and are you seeing anything that will indicate that Oakland can pull through this?
Chris Thornberg (28:47):
No, nothing. I mean, a completely collapsed leadership. The city council has been focused on the wrong set of issues. They've passed any number of tax changes, which seem almost designed to drive business out of their neck of the woods. And of course, we have the issues with the mayor race. We all know about those issues. So it really seems to be a ru the ship right now, and that's a shame because it's such a jewel in the Bay Area. We know the potential it has go back to when Jerry Brown was mayor of Oakland for those eight years, and it was unbelievable. The Renaissance, all the new housing that was put into place, the new energy and all that's being reversed. And again, it goes back to the idea of just not being able to focus on what's really important. So I know I'm very worried about Oakland, at least keep something to mind. Again, it's not fundamental. Look at Emeryville. That place couldn't be busier, it couldn't be more successful. This is a local political leadership conversation, and that's what we need to be focusing on.
Keeley Webster (29:55):
Okay. So Marc, you've been a long time supporter of XBRL. Can you explain why you think the federal government's adoption of the Financial Data Transparency Act and the use of financials being reported in a machine readable format like that, how would that apply to Oakland and how could that have maybe helped avert what is occurring there right now?
Marc Joffe (30:19):
So the key thing here is not only having financial data in an easy to use format, but then doing something with that data. So the think tank that I work for, a California policy center recently released a fiscal dashboard where they look at 10 financial ratios based on annual comprehensive financial report data. And I'm looking at Oakland right now, and based on the 2023 afer, we rated it a D ranked 407 out of 419 cities. So getting this financial data off of afer and into models is something that can add a lot of value to people who have previously depended solely on credit ratings. But because Afer come out with a delay and they're backward looking, it's really important to also be able to get budget information and interim financials in machine readable form. Theoretically, that's within the envelope of the FTTA, but it would also require that cities do more voluntary reporting. So for example, I looked at Emma just before we had this call, and I didn't really see a lot in terms of recent budgets or recent interim financials for Oakland, which would limit people's ability to take advantage of machine readable data if and when it becomes available to get the latest ratio analysis on the city.
Keeley Webster (31:50):
So this has been a really wide ranging conversation. Both cities clearly have some work ahead of them. And thanks to both of you for joining me here today.
Mike Scarchilli (32:01):
We hope you enjoyed this episode of the Bond Buyer Podcast. A big thank you to Chris Thornberg and Marc Joffe for sharing their insights on the economic pressures facing San Francisco and Oakland. And to our senior reporter, Keeley Webster, for leading such an in-depth discussion. Here are three key takeaways from today's episode. One, San Francisco's economy remains resilient despite challenges, but key neighborhoods are struggling while office vacancies and retail closures have dominated headlines. The city's tech and venture capital sectors are still drawing investment. However, a lack housing and policy stagnation could stifle long-term recovery. Two, Oakland's financial distress is deepening with a looming risk of bankruptcy. The city's governance issues, rising deficits and credit downgrades highlight the need for urgent financial reforms. While some revenue solutions are on the table, leadership, stability and strategic economic planning will be critical. And three, addressing these challenges requires big picture thinking and bold policy changes. Whether it's easing zoning restrictions to spur housing development, modernizing tax policies, or investing in infrastructure, both cities need a broader vision to sustain long-term economic growth. Thanks again for listening to the Bond Buyer Podcast. This episode was produced by the Bond Buyer. If you liked what you heard, please hit subscribe on your favorite podcast platform. Leave us a review and check out our latest coverage at www.bondbuyer.com. Until next time, I'm Mike Scarchilli signing off.