The Downfall of San Fransisco (Part 2)

9 min readJun 24, 2024

Welcome back to Code Economics. Last week, we explored the rise of San Francisco as a global tech hub. This week, we dive into the pressing issues that have overshadowed this once-thriving city. If you haven’t read last week’s article, I recommend reading that one before coming back to this one:

Is San Fransisco Still Worth it? (Part 1)

Hey everyone, welcome back to another week at Code Economics. Today, we’re exploring a hot topic in the tech community…

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Disclaimer: before diving into the issues plaguing SF today, I should point out that I do not enjoy seeing this happen to what was once my favorite city in the US. I think that San Fransisco has unrivaled potential to once again reclaim its status as the target city of every young person looking to enter tech or entrepreneurship. I think most of the issues I will talk about in this article can be fixed, and in some ways, the city is already better than it was at its low point during COVID.

The Downward Spiral

San Francisco’s recent troubles stem from many factors, including policy missteps, economic shifts, and social challenges. As someone who has been in/out of SF for most of my life the city started feeling like it was getting worse from 2014–2016, but it wasn’t until COVID that many of SF’s systemic issues unraveled giving us what we have today.

So let’s briefly go over what issues are common talking points about San Fransisco today.

Homelessness and Public Safety

San Francisco has long struggled with homelessness, and it is probably the issue that most people associate San Francisco with. The short version of this is that the city’s permissive stance on encampments, coupled with insufficient mental health and addiction services, has led to visible and widespread homelessness. Areas like Tenderloin/SOMA/Mission are particularly affected, with encampments, drug use, and property crimes contributing to a perception of danger and disorder.

Homelessness in SF is so widely recognized that articles from publications all around the world have written articles about it. Here are two articles from China Daily, and Reason.com showing the different talking points on SF homelessness.

Economic Impact of Remote Work

The COVID-19 pandemic accelerated the shift to remote work, hitting San Francisco’s economy hard. SF has the highest percentage of the workforce working in tech out of any city in the country. With COVID, most companies in this sector went remote and with the zero interest rate environment causing a huge war for talent, many of these employers became more geographically diverse in where they sourced talent from. While there is a big push for RTO, the city has still seen a dramatic drop in daily foot traffic.

San Fransisco commercial real estate is in a uniquely bad position across the country, with office vacancy rates having reached record highs, and many businesses having closed or relocated. Historically, real estate investors would not want to purchase office space in a market with more than a 15% vacancy rate, and now San Fransisco is over 36%. This “doom loop” of declining tax revenues and the economic downturn has further strained the city’s resources. San Fransisco has a huge budget of 14+ billion dollars, one of the highest per capita in the country — this isn’t sustainable without a robust commercial real estate industry and bustling downtown.

Retail and Business Closures

This is another issue that has been commonly used in right-wing media to portray San Fransisco as a lawless place. There is a lot of petty theft, broken windows, and generally high property crime rates that loop back into the decline in foot traffic for the city. Major retailers like Nordstrom, Whole Foods, and Macy’s have shuttered their downtown locations, citing theft and a deteriorating business environment. This has led to significant job losses and reduced economic activity.

A common sight in downtown San Fransisco is seeing boarded-up storefronts. Let me be clear, this issue is endemic to downtown, and you still see other neighborhoods in SF thriving. Downtown is however not painting a great picture for SF as a business and tech hub.

Drug Crisis

San Francisco’s approach to drug policy has focused on harm reduction, including the provision of clean needles and safe injection sites. While these measures aim to mitigate health risks, they have not been accompanied by robust enforcement against drug trafficking and public drug use. The result is a visible drug crisis that exacerbates the city’s public safety and health challenges. Fentanyl has created a serious issue for the SF drug administration. The common pipeline we see is the housing crisis creating more homeless combined with a lax drug policy resulting in a huge conversion of homeless to drug users.

It is unfortunately not an uncommon site to see many homeless encampments like this in parts of San Fransisco where multiple people are shooting up hard drugs in broad daylight. While I think it’s unlikely for any of these people to bother most pedestrians, it doesn’t contribute to a feeling of safety and is another hit to the quality of life for most residents.

Political and Policy Challenges

San Francisco’s progressive policies have faced criticism for being too lenient on crime and homelessness. The city’s approach to criminal justice, particularly under former District Attorney Chesa Boudin, prioritized reducing incarceration and implementing restorative justice practices. Critics argue that this leniency has contributed to an increase in property crimes and drug-related offenses. The recall of Boudin and subsequent policy shifts highlight the ongoing political debates about how best to manage these issues. I think this one is tougher to tackle, but I generally believe that informative justice can work, however, how it is done in the US is very poorly executed and typically results in empowering criminals and letting them off the hook early. Many liberal cities in the US are having the pendulum swing the other way and I think we are in for many future mayors of cities like San Fransisco who will be tough on crime.

Economic Policies and Business Environment

High taxes and stringent regulations have also played a role in San Francisco’s struggles. The city’s regulatory environment can discourage investment and drive businesses away. Combined with the impact of remote work, these factors have led many companies to downsize or relocate, contributing to the economic decline. To be honest, I think this issue is overblown by many Republicans, but we do see a shift across the US of people and businesses moving from high-tax to low-tax states.

You can see from this map that many states that had the largest increases are states with much lower rates than states like Illinois, California, New York, and Massachusetts which all saw huge outflows of workers.

Specific Policies Contributing to the Crisis

Now let’s also briefly bring up a list of policies that got San Fransisco to where it is today:

Proposition M (1986): This policy introduced strict growth controls on office space development in San Francisco. The cap on annual office space development has constrained the ability to expand commercial real estate, leading to a scarcity of office spaces and higher prices, which has also impacted housing demand by limiting the overall growth potential of the city.
Rent Control Laws: San Francisco’s rent control policies, while intended to protect tenants, have had unintended consequences. The laws limit the ability of landlords to increase rents, which has led to reduced investment in rental housing and decreased incentives for property maintenance. This has contributed to a shortage of available rental units and increased housing prices overall. This deserves an article on its own, but if there is anything you take away from this article, it’s that rent control doesn’t work. This is something both left and right-wing economists agree on.
Inclusionary Housing Ordinance (1992, updated in 2002 and 2012): This ordinance requires developers to include a certain percentage of affordable housing units in new developments or pay a fee to support affordable housing elsewhere. While this policy aims to increase affordable housing stock, it has also increased development costs and slowed the rate of new housing construction, exacerbating the housing shortage. Let me be clear: the only solution to the housing crisis is simply building more housing. Housing becomes affordable if there is enough supply to satiate demand. Everything else is a band-aid fix for the housing crisis.
Housing First Policy: The shift towards a “Housing First” approach in addressing homelessness prioritized the development of permanent supportive housing over emergency shelters. While this approach provides stable housing for some, it has led to a reduction in shelter capacity. For example, during Mayor Gavin Newsom’s administration, the city reduced emergency shelter beds while focusing on permanent supportive housing, contributing to the rise in unsheltered homelessness.
Proposition 13 (1978): Although a statewide policy, Proposition 13 has significantly impacted San Francisco by capping property taxes. This has limited the revenue available for public services, including housing and homelessness programs, and has reduced the financial incentives for property owners to sell or develop new properties, thereby contributing to the housing shortage and increasing prices. It should be noted that Prop 13 is a huge issue in California that transfers wealth from renters to homeowners and is a crux in the California housing crisis. It is also why California has such high income taxes — it has one of the lowest effective property tax rates in the country. Here is an article that perfectly describes the issue by using the painted ladies of San Fransisco.

Here is an image from the article. Despite all the houses being nearly identical, they have drastically different property tax outcomes.

Can San Francisco Rebound?

Despite these challenges, San Francisco remains a city with immense potential. Its rich history of innovation, access to elite tech talent, and robust venture capital ecosystem are significant assets. However, addressing the city’s current issues will require comprehensive policy reforms and a renewed focus on public safety, housing, and economic development.

Next week, we will explore potential solutions and whether San Francisco can reclaim its status as a premier destination for tech professionals. Stay tuned for more by subscribing to my Substack!

In case you missed it, I did a recap on current trends in SaaS companies after their public earnings as well as a breakdown on what are the key metrics you need to consider when evaluating these companies:

Understanding SaaS Metrics: Key Insights for 2024

Hey everyone, welcome back to another week at Code Economics. Today, we will dive into Software as a Service (SaaS)…