Hollowing out of San Francisco raises fears over status as top tech hub

At rush hour on a recent morning in downtown San Francisco, passengers exiting the Civic Centre station had to step over a discarded hypodermic needle, an all too common sight in a city where open air drug use has become unremarkable.

Around the station, usage of which has plunged two-thirds since 2019, the most obvious presence was not commuters heading into work but rather groups of homeless people and workers from a social enterprise trying to help them.

Homelessness and addiction are nothing new in San Francisco, which has fought a long campaign to house the vulnerable, but a surge of office vacancies following the pandemic has left the city feeling increasingly hollowed out.

Meanwhile, fears over crime hit fever pitch earlier this month following the fatal stabbing of Bob Lee, the 43-year old founder of mobile payments service Cash App. His death was seized on by Elon Musk and others as evidence that a liberal approach to law and order had allowed crime to go unchecked, until it later emerged Lee was in fact known to his suspected assailant.

Still, the hasty conclusion that Lee was a victim of pervasive lawlessness only served to underline fears that empty offices and crime will combine to unseat San Francisco as the premier hub for global tech.

Salesforce last week put the remaining six floors of a San Francisco tower that bears its name on the market, as it became the latest tech group to slash its footprint in the aftermath of job cuts and a work-from-home culture that has taken root to a much greater degree than in other cities.

A few days later, high-end supermarket chain Whole Foods closed its flagship downtown store, citing elevated levels of theft and fears for its workers’ safety.

Some prominent members of the city’s venture capital community have left, while others warn of the opportunity cost of losing future start-ups to other cities.

“Things had become so fundamentally dysfunctional and were going so badly in the wrong direction that I was not bullish on San Francisco as a place to raise my family,” said Joe Lonsdale, head of $2.7bn venture capital firm 8VC, who relocated from San Francisco to Austin, Texas, in 2020.

Jason Calacanis, a tech entrepreneur and investor, said some entrepreneurs were considering other US cities to launch or grow their businesses. “Founders . . . who used to see San Francisco as the ultimate destination for their start-ups are now choosing to go to Austin, Miami, or the wider Bay Area and avoiding San Francisco,” he said. “The number one reason they tell me is safety issues.”

Even those who are determined to stay in the city are retreating from the centre, such as Felicis Ventures founder Aydin Senkut. He moved the offices of his $3bn investment firm from the financial district to a quieter neighbourhood called Presidio “in part due to downtown feeling much less safe for us than before”.

Homicides and aggravated assaults have increased in San Francisco over the past two years, according to government data. However, the 55 murders recorded last year is roughly average for the last decade and the increase is in line with national US trends. Overall violent crime in the city fell between 2013 and 2021.

“If you look at the statistics you would say [the idea of a crime wave] is more perception [than reality]. But for the public, perception is reality,” said Kanishka Cheng, founder of TogetherSF, a community organisation trying to tackle homelessness and drug abuse in the city.

City data shows the number of people living on the streets actually fell more than 15 per cent to 4,397 between 2019 and last year. “But a few factors changed during the pandemic which made things a lot worse,” said Cheng. “We have a nationwide opioid crisis which spiked during the pandemic.”

What is not in doubt is that San Francisco is emptier than it was before Covid-19, largely because of the enduring popularity of remote working at tech companies. The weekly average number of passengers arriving by train at Embarcadero station, which serves the downtown area, has fallen by about 70 per cent since 2019, according to the body that runs rapid transport. By contrast, the number of passengers commuting into New York’s central subway stations is down between 30 and 40 per cent, per official state figures.

Remote workers have little incentive to live in the city, with rents among the highest in the US. Between July 2020 and 2021, San Francisco lost the most residents by share among major US cities, according to the US Census Bureau.

Vacant office space in San Francisco now totals more than 21mn square feet, according to real estate agency Cushman & Wakefield, while rents have fallen more than 15 per cent from pre-pandemic peaks. Vacancy rates have surged to 30 per cent, compared with 16 per cent in Manhattan and 8 per cent in London, according to real estate agency JLL.

Declining office values are projected to wipe hundreds of millions of dollars from San Francisco’s tax take in the next few years, leaving officials with even less cash to combat social issues.

While the Bay Area is still the dominant US location for start-ups, venture capital and tech innovation, it is slowly losing ground to New York and Los Angeles. It accounted for about a quarter of all US venture capital deals in 2014, but that had declined to just over 20 per cent last year, according to PitchBook.

Some prominent figures in the tech community insist it is still far too early to count San Francisco out, pointing to advantages such as its proximity to Stanford and Berkeley universities. OpenAI, the most highly valued generative AI start-up, is hunting for new office space in the city, according to a real estate broker with knowledge of the company’s plans.

“People love to cast this idea that SF is dead and there’s a new tech centre: Miami, or London or New York,” said Mike Volpi, a partner at Index Ventures. “San Francisco undoubtedly has socio-economic problems, but it is not yet at a point of implosion . . . it’s still a mecca.”

Many are concerned, however, that left unchecked the city’s social problems could drive talent and capital away, undermining San Francisco’s status in the global tech ecosystem.

“About 15 years ago it would have been a joke to [start a tech company] anywhere else,” said 8VC’s Lonsdale. “Now it is no longer the case that it is the only place to start or scale your company. It is still an extremely critical place, but its relative importance has gone down.”