SF stretched to the limit by tech boom, says city report

San Francisco’s years-long tech boom has The City bursting at the seams.

Scarce office space, a housing crunch and a transportation system at near capacity are restricting further economic growth, according to the voter-mandated “Five-Year Financial Plan” released Thursday by the City Controller’s Office.

And yet, that’s not as big an issue as it might have been.

The technology sector is slowing down irrespective of San Francisco’s capacity issues, according to the report.

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But the bad news for city government is that those soaring revenues of a years-long tech boom are coming back to Earth and San Francisco is right back where it started from in terms of facing large budget deficits.

“Despite significant efforts and policy changes in the past six years to address The City’s long term structural deficit, the current five-year deficit projection has increased back up to 2011 levels,” according to the financial plan. “The reasons for [this] are largely related to rising employee costs (pension being the biggest factor), increasing voter mandated commitments through baselines and set-asides, and increasing positions and services.”

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But if the tech sector were to pick up, San Francisco couldn’t handle additional growth, the report notes.

“Given The City’s constrained housing market, it is unlikely that the resident labor force can readily expand much further in the short term, and this should lead to a slowdown in the rate of job growth in The City, even if the demand for new hires remains high,” the report reads.

The overall job growth was faster than experienced during the dot.com boom. After adding some 25,000 jobs annually since 2010, San Francisco’s job market grew to 668,900 jobs, which is “60,000 more than at The City’s previous economic peak in 2000,” report said. Between 2010 and 2015, the tech sector increased its share of the total job market from 9 percent to more than 20 percent.

The unemployment rate is at 3.5 percent, lower than the 4 percent during the previous economic cycle that peaked in 2007-08.

Office space is another big factor restricting further economic growth.

“A second infrastructure-related constraint likely to drive a slowdown in employment and tax revenue growth is the office market,” the report reads. “While not at historically-low vacancy levels, office vacancy by the second quarter of 2016 was lower than it was any time since 2000. A tight office market limits employment and revenue growth in a manner similar to the tight housing market: even companies that want to add headcount in The City find it hard to find the space to do so.”

Between September 2014 and September 2016, office vacancy rates have hovered between 8 percent and 10 percent. In September 2010, the office vacancy rate was nearly 18 percent.

The third main factor cited in the report constricting economic growth is the transportation system.
“Rapid economic growth this decade has placed strains on the region’s transportation system, which will likely further limit The City’s ability to grow at rates experienced earlier in this decade,” the report reads.

Time spent commuting has increased by more than 50 percent since 2011. “In economic terms, an increasingly costly commute makes The City less competitive as an employment center, leading to higher labor costs for local businesses, and a greater tendency for job sprawl within the region,” the report reads.

While the report highlights how San Francisco’s real estate and transportation is at near capacity, it emphasizes these are not to blame for the current tech slowdown.

“While the data does not point to a tech-driven downturn in the local economy, it does suggest that the slowdown has more to do with the fundamentals of the tech industry’s business cycle, than with San Francisco’s real estate market,” the report reads. “Not only has technology employment growth slowed more than overall employment, but leading indicators of the tech sector like the stock market and venture capital have slowed as well.”

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