Empty office buildings may sap city tax revenues

Bond investors may be underestimating the financial challenges facing San Francisco, the wealthy West Coast tech citadel, in a work-from-home world.

Why it matters: The persistence of remote work in San Francisco shows how the COVID-driven restructuring of the American office can have broad and unexpected implications throughout the economy — even in the normally sleepy market for U.S. municipal bonds.

Driving the news: Vacancy rates in San Francisco's office sector soared to a record high 27% percent at the end of last year — and the city’s downtown area has had the worst pandemic recovery in the country, according to the San Francisco Chronicle.

Be smart: Like New York, San Francisco derives a considerable part of its revenue — somewhere in the neighborhood of 20% — from taxes tied to the value of office buildings.

• San Francisco officials have estimated that the hollowed-out office sector could cut city tax revenues by as much as $200 million annually in coming years.

The intrigue: While municipal bond markets seem to have priced in pressure on New York City's real estate-related tax revenues, they seem to have given San Francisco something of a pass, Barclays analysts wrote in a recent note.

• The analysts pointed to a rally since the start of the year in some San Francisco municipal bonds, versus bonds issued by New York that had similar characteristics.
• They argue that the rally didn't seem to take into account the impact of remote work on San Francisco's tech sector, compared with New York's finance-dominated economy where workers have been slowly nudged back to the office.

What they're saying: "The big difference with San Francisco is the more permanent remote work or the layoffs," Clare Pickering, municipal bond strategist at Barclays, tells Axios. "When you look at the tagging — going into offices — it hasn't come back as strongly."

What to watch: As Pickering points out, San Francisco's situation hasn't been helped by the recent run of tech layoffs.

Yes, but: For all the job cuts, the San Francisco-area's unemployment rate remains remarkably low, at under 3%.

• That suggests that for now the layoffs might be less a problem for tech workers — who can often easily find new, even remote jobs — than for the landlords who once rented their employers' spaces.

The bottom line: We're still in the very early innings of the remote work revolution — but it's already touching a broad range of investors.