A few weeks ago, I took my car to the mechanic in Downtown San Francisco. It was a nice day, with nothing else to do and, contemplating the assorted possibilities of COVID exposure in an Uber or public transport, I decided to walk home – a distance of about 6 ½ miles. It was 09:30 on a weekday morning. It was a shocking stroll. I had read all the stories, of course, but seeing it was different. The city was empty. There was no one on the street. No one going to work, or out for coffee, or waiting for a bus. No muni-trains or streetcars rumbling down the hill. Every third storefront had a For Lease sign.
An owner of several rental apartments told me he has a problem. He has to get rid of furniture abandoned by tenants. They just tossed their clothes in a car and fled as if Godzilla had landed on Ocean Beach and was moving east. Some were longer-term tenants in cheaper rent-controlled buildings.
- Twitter sub leases 100 thousand square feet in San Francisco
- Pinterest pays $90 million to get out of a lease commitment
- Stripe employees are offered $20,000 and a pay cut to leave the city
- Apartment rents decline 20% but remain at an astronomical $2,240 for a one bedroom
Despite what we hear hourly from various politicians and pundits, a string of anecdotes are interesting but they are not data. The data seem to show that people with means are leaving the cities. This is oddly similar to Henry VIII fleeing London to avoid the plague 700 years ago.
More importantly perhaps, people are not returning to work. They are working, but they are not going to their offices. Only 15% of those with office jobs are actually showing up every day. In New York City, it is only 8%.
The politicians and the media have so perfectly terrorized the population that it does not matter that offices opened in San Francisco in June. No one is going there.
For the coffee shops, drug stores, restaurants, and retail shops, 85% of the workers absent means the game is over. The expectation is that half of the 4,415 restaurants in the city will close permanently.
People came to the cities for jobs, of course, but also for the quality of life – the sophisticated art and music, the varied entertainment, and the cosmopolitan population. And they paid a fabulous premium to live in that rich environment.
Now, with all those amenities gone or fading. more residents are realizing that having dinner in a parking space in front of the local drug store is not so pleasant (and may be not worth the $25 entrée). It is not surprising that people are leaving.
Unfortunately, our good-hearted (but mostly innumerate) public servants do not understand that restaurants, bars, and movie houses are not viable at 25% or even 50% of capacity.
Then the politicians were shocked (shocked!) to discover that when they shut down economic activity, there is no tax revenue. Naturally, instead of pay cuts reducing headcount to match their shrinking tax base, they decide to raise taxes.
At the school of public administration, I suppose they teach them that when the product is not selling, it is time to raise the price!
Can this turn around? Will it spread to the rest of the Bay Area?
We have heard this story before. Silicon Valley has finally topped out and the growth in that exquisite entrepreneurial haven had finally peaked. We heard it after the dot.com crash in 2000. We heard it again, albeit more muted, after the Fannie Mae-Freddie Mac inspired mortgage meltdown in 2008-09. Now, here it is again during the COVID panic.
Many times, we’ve asked VCs and others about their preference to focus investment in the valley companies rather than less expensive locales. The answer has always been the same. The aggregation of entrepreneurial talent and service infrastructure to support start-ups is so robust that speed offsets the higher costs. That “creative clustering” has been the magic elixir in the valley for decades.
Will that change when the accounting, legal, HR, and marketing outsourced companies can operate just as effectively from a mountainside in Colorado? What happens when the engineering talent can be had at lower cost remote locations? Will the massive headquarters of Apple, Cisco, and Facebook be emptied out over time? Can the creative clustering go virtual?
We are finally accepting that the virus is not going away anytime soon. Eventually, there may be a vaccine and effective treatments. With the increasingly politicized science surrounding drug development and with prominent politicians making anti-vaxer type appeals, it is difficult to know if the availability of a vaccine will actually change behaviors. Even when the virus is fading, for some significant portion of the population, the fear of the virus will remain.
After the AIDS/HIV pandemic, human behavior changed permanently. The question we have been wrestling with is this: What permanent changes in behavior will result from this pandemic?