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SF’s soaring office market was slowing down. Then the coronavirus hit



The coronavirus epidemic closed down almost all San Francisco businesses and sent hundreds of thousands of workers home. Now, the city’s office market is facing the most uncertainty in more than a decade, although strength in the tech sector could help a recovery, according to experts.

Even before the outbreak, leasing activity slowed in the first quarter — though that was due to lack of available space, said Robert Sammons, Bay Area research director at brokerage Cushman & Wakefield.

San Francisco activity totaled 1.5 million square feet, the lowest quarterly level since 2015, he said. Only one lease, Deloitte’s renewal for more than 200,000 square feet at 555 Mission St., was more than 100,000 square feet. Preliminary first-quarter data from Cushman & Wakefield released Wednesday was gathered before the impact of the virus.

The vacancy rate rose to 6.7% from 5.4% as more sublease space was listed, though vacancy is still among the lowest in the country, according to Cushman & Wakefield. Asking rents were stable compared to the end of last year at $82.60 per square foot annually, the highest in the country.

The impact of the virus is still uncertain.

“It is unknowable right now. There is no historical analog for something like this,” Kevin Thorpe, chief economist of Cushman & Wakefield, said in a conference call this week.

Some economists expect a sharp decline followed by a swift rebound that could limit damage to jobs and office demand. In contrast, the 2008 recession lasted 18 months and the recovery was weak for years.

“If it is slow and sharp … then I think there will be some office repercussions, but not anything near where we’ve seen in past recessions,” Thorpe said in an interview. “If this is extended, then I think some companies might take other actions” to cut costs and lay off workers.

CBRE, a commercial real estate brokerage, estimates that the economy will stabilize by the third quarter and a recovery will begin by the fourth quarter. National unemployment is expected to rise from 3.5% to over 5% by midyear with a loss of 3 million jobs. The recovery could be faster than 2008, thanks to stronger government intervention and pent-up demand, CBRE said.

Large tech companies are expected to weather the storm and keep expanding, said Colin Yasukochi, executive director of CBRE’s Tech Insights Center.

The boom in video conferencing and online communication has helped local companies like Slack, Facebook, Google and Zoom. (Slack is headquartered in San Francisco, where Facebook and Google have large offices; Zoom is in San Jose.)

“It’s probably one of the more resilient sectors aside from consumer staples, such as food,” Yasukochi said. “It’s hard to conceive a scenario where the bottom falls out of rents like it did in the dot-com era. The major companies are probably going to get out of this OK.”

But it could be tougher for smaller and medium-size startups — many of which aren’t profitable. Struggling companies could seek to cut costs and lay off workers, he said.

A recession, which was unthinkable just weeks ago but now seems almost certain, also could push more companies to relocate jobs into less expensive markets, an exodus that already was happening before the virus.

One of the biggest real estate moves this year was Macy’s February decision to close its online operations in South of Market, laying off 831 employees and listing 243,000 square feet for sublease. Macy’s will shift online operations to New York and lower-cost Atlanta.

Available sublease space in San Francisco rose from 3.5 million square feet to 3.7 million square feet during the first quarter, indicating that more companies are slowing growth, said Alexander Quinn, Northern California research director at brokerage JLL.

Companies listing space include Uber, Collective Health, Dropbox and McKesson, which moved its headquarters from San Francisco to Texas in 2018.

Retailers like Macy’s likely will feel even more pain and could cut office jobs along with employees in stores, Yasukochi said.

Massive projects, including the redevelopment of the Flower Mart, the Tennis Club at 88 Bluxome, and a site at First and Harrison streets, were expected to receive building permits and start construction within the year. It isn’t clear iwhether the coronavirus will delay those projects.

“There’s definitely a pullback on risky activity and construction is a risky activity,” said Yasukochi, who added that he expects more developers to secure tenants before breaking construction.

The short-term crisis could also prompt more companies to allow employees to work from home, which could lessen demand for offices entirely.

There is also much uncertainty over office rental payments, and whether tenants will be able to get rent reductions as workplaces are closed.

Marqeta, an Oakland tech company that manages online payments, said having 375 global employees work remotely has been successful. It’s now more open to hiring in places far from California.

“It has opened our eyes to how we could make a virtual model work. We’re now open to hire across borders. We’re not limited to the Bay Area,” said Vidya Peters, Marqeta’s chief operating officer.

Marqeta has been using Zoom, Slack and Google Hangouts to communicate and there haven’t been any major issues. The company has 41 open positions, with the majority in the Bay Area.

“The last few weeks have shown us that this can work across the company,” she said.

Peters said many engineers are enjoying having fewer distractions and completing tasks faster.

Another unresolved question is whether tenants will receive rent breaks if their offices remain closed due to government orders. Those negotiations will have to be resolved by lawyers, said Quinn of JLL.

“Nothing will be sorted out in immediate term,” Quinn said. “No one knows the depth and extent of COVID-19,” the disease caused by the coronavirus.

Roland Li is a San Francisco Chronicle staff writer. Email: Twitter: @rolandlisf


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Fewer deaths in Veneto offer clues for fight against virus




When, at the end of February, Lombardy and Veneto recorded Italy’s first local cases of transmission of coronavirus, the two regions quickly erected road blocks, establishing Europe’s first lockdown and a precedent for the rest of the continent. 

Since then the fortunes of the two wealthy neighbours, which have some of the best-resourced health systems in Europe, have diverged.

Struck by a human catastrophe unseen in Europe outside of war, with military trucks taking away corpses from the city of Bergamo, Lombardy has a death rate of 17.6 per cent.

Nearby Veneto’s stands at 5.6 per cent. While virologists caution that the percentage death rate is closely tied to the level of testing, they also attribute the gap to other factors, such as Veneto’s reluctance to hospitalise compared with its neighbour. 

“Veneto has a very low mortality compared to the rest of Italy,” said Professor Andrea Crisanti, a leading virologist from the University of Padua, in charge of a mass testing programme across Veneto. “This shows that our approach has worked well so far.”

As of Saturday Lombardy, which has a population of 10m people, accounts for 8,656, or 56.3 per cent, of Italy’s total declared deaths from the virus of 15,362. Meanwhile Veneto, which has a population of 4.9m, has suffered 607 official deaths out of 10,824 diagnosed cases. 

Higher levels of testing and tracing in Veneto is the most widely cited explanation for why the region has managed to control its outbreak more effectively than its neighbours. 

Editor’s note

The Financial Times is making key coronavirus coverage free to read to help everyone stay informed. Find the latest here.

Luca Zaia, governor of Veneto, was the first regional head in Italy to devise a widespread testing programme that involves drive-through swabs done in cars as well as tests in medical centres.

This went beyond World Health Organization guidance, which advises to test and trace suspected cases. On the advice of the region’s scientists, Veneto has to date conducted 133,289 tests as of Saturday, the second-highest in Italy after the 141,877 of Lombardy in spite of having half of its population.

Yet experts say testing is not the only reason for the lower death rate.

Venetian doctors also cite the region’s expertise in infectious disease, something they trace back to its pioneering history dealing with viruses arriving in its port from the east. The word quarantine derives from quarantena, the Venetian word for “40 days”, or the amount of time ships arriving from plague-ridden destinations were isolated.

For Giorgio Palù, one of Europe’s leading virologists, and scientific adviser to the governor of Veneto, a critical factor has been the number of diagnosed patients taken into hospital.

The number of diagnosed patients who were taken in hospitals for clinical treatment at the start of the outbreak was about 65 per cent in Lombardy, Prof Palù said.

This compares with 20 per cent in Veneto, where the majority were told to stay at home unless urgent care was required.

“There were different instructions given to the sick by the different regional health authorities,” he said. “Yes, there has been more testing in Veneto but people were kept at home and not taken into hospitals. The more patients you admit to the hospital, the more cases you get. You create the outbreak as at the start nobody was taking care of sampling the doctors or nurses, [so] you were taking home the infection.”

His observation comes as more than 60 Italian doctors and health workers have died, the majority of these in Lombardy. A group of doctors from the Papa Giovanni XXIII hospital in Bergamo warned last month that hospitals had become the main source of transmission of Covid-19 infections, and urged more patients to be treated at home.

Doctors and nurses on the frontline of the fight against coronavirus in Rome, Bergamo and Brescia
Doctors and nurses on the frontline of the fight against coronavirus in Rome, Bergamo and Brescia © Domenico Stinellis/Antonio Calanni/Luca Bruno/AP

“We are learning that hospitals might be the main Covid-19 carriers,” they wrote in the New England Journal of Medicine. “They are rapidly populated by infected patients, facilitating transmission to uninfected patients.”

The Veneto region has a large network of smaller health centres, which have been used to diagnose and treat patients in ways that have kept them out of large hospitals, said Prof Palù.

The fact that Lombardy has a greater proportion of private hospitals than Veneto also contributed to more Covid-19 patients ending up in hospitals, he argued. The Lombardy administration was also under political pressure, Prof Palù added. 

“In Lombardy there were too many admissions from the primary side, where the triage was done. The Italian prime minister at the start criticised the hospitals in Lombardy, and it seems they responded by wanting to show they were treating people, not telling them to stay at home.”

Officials in Lombardy also said Rome should have done more. “I put my mask on on the television, and they insulted me and told me that I undermined Italy’s credibility,” said Lombardy’s governor Attilio Fontana this week. “Perhaps I should have been tougher in opposing the [central] government.” Late last month, Lombardy established teams of medics to monitor at home patients who had been discharged from hospital. 

The mood in both regions is still sombre. “Have we committed errors? Of course we have,” said Giulio Gallera, Lombardy’s head of welfare last week. “We have always given our best to offer the many people who arrived in our hospitals the necessary care . . . we have done the best we could.”


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U.S. banking group warns of ‘massive’ delays, tech issues with small-business rescue program




WASHINGTON (Reuters) – Hundreds of U.S. lenders are struggling to access the technology system for distributing $349 billion of government rescue loans, while the pot of money is insufficient and will soon be expended, a top banking group warned over the weekend.

Congress last month created the unprecedented program as part of a $2 trillion stimulus package to help businesses which have either shut down or have been dramatically curtailed by the coronavirus pandemic. Borrowers could apply for the loans via participating banks from Friday until June 30.

The program is being jointly administered by the U.S. Treasury Department and the Small Business Administration (SBA).

“Community bankers are frustrated with failed technology links and portals. Even those banks with access to the (SBA) system have shared their experiences of significant challenges with user access and latency in application processing,” the Independent Community Bankers of America (ICBA) wrote in a letter to the Treasury and SBA on Saturday evening.

The powerful lobby group, which represents thousands of small banks, added that lenders are “experiencing massive delays and (an) inability to process loans or even access the SBA.”

The Treasury and the SBA did not immediately respond to requests for comment on Sunday, although Treasury Secretary Steven Mnuchin has said the agencies are working hard to fix issues with the program.

“Funding of $349 billion is frankly inadequate for the magnitude of need in the American small business community and is likely to run out quickly,” the ICBA continued, warning that the largest U.S. lenders would quickly suck up the majority of funds, leaving community bank customers with nothing.

The group called for the government to allocate at least 25% of the existing and future funds for banks of $50 billion in assets or less, in line with their share of industry assets.

It also said the government should address an “urgent need for liquidity” by purchasing loans made through the program, allowing small banks to free up their balance sheets and continue lending.

“This program should not be limited by the balance sheet capacity of participating lenders,” the group added.

Reporting by Michelle Price; Editing by Daniel Wallis

Our Standards:The Thomson Reuters Trust Principles.


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Fed’s Bullard says another coronavirus economic relief bill may not be needed




WASHINGTON (Reuters) – A top official at the U.S. Federal Reserve said on Sunday the $2.3 trillion economic relief bill approved by Congress was appropriately sized and that a further relief effort may not be needed if support efforts are well executed.

FILE PHOTO: St. Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore October 8, 2018. REUTERS/Edgar Su/File Photo

“I felt like this one was well-sized for the situation,” St. Louis Federal Reserve Bank President James Bullard told CBS’ “Face the Nation” when asked if further legislation would be needed.

“I think you’ve got the right amount of resources,” he added. “The challenge is how are you going to get that to the right people that really have been disrupted. That’s the execution risk that you have here.”

U.S. lawmakers have said they plan to push forward with further legislation to respond to the pandemic.

Senate Republican leader Mitch McConnell told the Associated Press on Friday he would like the next relief bill to focus on healthcare, while House Speaker Nancy Pelosi – the top congressional Democrat – has said lawmakers need to focus on further economic relief.

If relief efforts are well-executed, there was no reason to think the U.S. economy could not have a sharp rebound, Bullard said. “There’s nothing wrong with the economy itself,” he said, noting that people have been asked to stay at home.

Bullard said a move to universal testing for COVID-19, the respiratory illness caused by the novel coronavirus, could help spur recovery by offering clarity on who could move about freely and fully participate in the economy.

He also said an emergency small business lending program that is a key part of the last economic relief bill could be quite helpful.

“I think there is a lot of potential for that program to be successful,” Bullard said.

That program got off to a rocky start on Friday, with some large banks saying they were not ready to start processing applications.

Reporting by Tim Ahmann; Editing by Nick Zieminski

Our Standards:The Thomson Reuters Trust Principles.


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