Population growth. Transit ridership. Office demand. Property tax revenues. The coronavirus pandemic upended the Bay Area economy — and many of the changes are likely to be permanent.
The question now is whether our local elected leaders can meet the moment. Whether they can pivot to plan for a future that will be radically different than previously assumed.
I hope they can. I’m fearful they won’t.
Revised population forecasts and office work patterns drive this seismic shift. The region has planned based on expectations of a rapidly increasing number of residents. But suddenly those numbers have reversed course, and state forecasts show that the Bay Area won’t return to its pre-pandemic population until midway through the next decade.
Meanwhile, after getting a taste during the lockdown, white-collar workers have embraced working from home, either full-time or on a hybrid schedule. Many employers have also championed the idea, recognizing that they want to keep their treasured workers happy and grabbing the cost savings that come from unloading excess office leases. They understand that remote work is here to stay.
The fallout is monumental. Transit ridership has plummeted. For example, weekday ridership on BART, which depends heavily on office workers, continues to hover at about 40% of pre-pandemic levels.
Bay Area office vacancy rates have hit record levels. The corollary to that is that office values are rapidly declining, and mortgage defaults are increasing. Similarly, the hotel industry is struggling.
In San Jose, weak demand for office and retail space, worsened by a troubled hotel sector, has building owners considering converting commercial properties to housing. In San Francisco, the revenue per hotel room is about 73% of what it was pre-pandemic. A major downtown San Jose hotel is looking to sell one of its two towers in a deal that would convert the space to student housing for nearby San Jose State University.
Pain lies ahead
This should set off alarm bells for local government officials. The rapidly increasing property tax revenues they forecasted before the pandemic will not materialize.
The pain will start to come in about a year, warns Santa Clara County Assessor Larry Stone. He just issued his county’s 2023 property assessment, which showed a surprisingly healthy 6.7% increase. But that’s because it’s based on property values in calendar year 2022, which started very strong, but around the middle, Stone says, “things started to come unglued.”
The big driver of the downturn, which is continuing in 2023, is, not surprisingly, office buildings. “The office market is now at the bottom of desired real estate property in Santa Clara County,” Stone says. That’s the Silicon Valley, a key driver of the Bay Area economy.
Compounding the problem, but perhaps not as permanent as the office-market realignment, are the huge drop-offs in home sales and new construction, cramped by rapidly rising mortgage rates.
All of this means less property tax revenue to fund schools, counties, cities and special districts. And it couldn’t come at a worse time. Local governments were propped up during the pandemic by bailouts, especially from the federal government. That’s ending.
Meanwhile, polling data suggests reluctance by Bay Area residents to venture into the region’s three major downtowns — each for a different reason: Crime in Oakland, homeless on San Francisco streets and lack of attractions in San Jose.
Failing downtowns, which are key economic drivers, will make it even harder for cities to recover.
Rethinking assumptions
Elected officials should be seeing these warning signs as prompts to rethink their financial and project planning. Their resources are limited and will likely become more constrained in the future.
This is the time when they should be reevaluating how they allocate their precious revenues. How they respond will tell us whether they will meet this moment.
Sadly, what we’re seeing right now is not encouraging.
BART officials, for example, should be rethinking rail service, scaling back because of reduced demand. Instead, they are increasing service, suicidally accelerating the race toward the “fiscal cliff” that’s right in front of them.
The Santa Clara Valley Transportation Authority has witnessed the cost of the planned six-mile, four-station South Bay BART extension more than double since 2020 to $12.2 billion. Yet board members show no appetite for rethinking the costly and unusual tunnel design or the necessity of the last leg, from Diridon Station in San Jose to Santa Clara, that duplicates existing Caltrain service.
Oakland’s mayor and City Council members are witnessing the exiting of downtown businesses and visitors because of the justified fear of soaring crime. But the elected officials, while giving lip service to law enforcement, remain unwilling to realign municipal spending to meaningfully increase the number of cops solving crimes and patrolling the streets.
Good governing requires making tough decisions about financial tradeoffs, evaluating the costs and benefits of spending, and considering alternatives to ensure maximum efficiency. It requires acknowledgement that past decisions might not be the best ones today. It requires the courage to change course when justified.
The region is entering the post-pandemic economy. The assumptions of the past must be altered to meet the future. That’s the challenge we face.
Daniel Borenstein is editorial page editor for The Mercury News and East Bay Times.