Fate of Rental Rates in Hands of Voters

SAN FRANCISCO—During the past five years, San Francisco has recorded an increase of 63.5% in office rents as the economy recovered from the Great Recession and continues to perform well, evident both in 2017 and early 2018. Voters will head to the ballot box today to decide the fate of further increased rental rates for commercial properties in San Francisco.

Historically, the city has held the honor of possessing the highest rental rates in the country, and two opposing ballot measures threaten to increase average annual rates for office space by $1.25 to $2.50 per square foot if passed. The rate increases would come in the form of gross receipts taxes that benefit either early childcare education or homelessness and low-income housing, two hot topics in the city.

San Francisco property owners are poised to push back hard against the measures, arguing that an increase to already existing gross receipts taxes will add yet another hurdle in competing for tenants considering a move to more affordable markets. In this exclusive, Jamie Mahoney, research analyst with Transwestern, has been actively monitoring the situation ahead of the vote and provided insight on potential impacts to the market.

GlobeSt.com: What is the current commercial property tax law in San Francisco?

Mahoney: There is currently a 0.3% tax based on gross revenues from renting commercial property, though certain protected uses such as nonprofits, residential, retail and some light industrial are excluded.

GlobeSt.com: Can you give a brief description of the two proposals San Francisco residents will decide on today?

Mahoney: The two measures propose additional taxes to the existing 0.3% tax that would provide funds for two of the city’s most pressing needs: housing for low- to middle-income families and early childcare education. Prop D, called Housing for All, would add a 1.7% tax on gross receipts and be expected to collect $65 million annually. The second, Universal Childcare for San Francisco Families, Prop C, would add a 1% tax on leased warehouse space as well as a 3.5% tax on leasing commercial space. That proposal is estimated to collect $150 million annually.

GlobeSt.com: What types of commercial properties would these measures impact?

Mahoney: The exclusions for both proposals are basically the same as those currently in place. This means the proposed measures would continue to mostly impact office users such as tech companies.

GlobeSt.com: How would either measure impact office owners or tenants?

Mahoney: Landlords typically pass through the property tax to commercial tenants as part of rent, so office users will see a more significant impact than property owners. If either measure passes, tenants can expect a $1.25 to $2.50 increase in average per-square-foot rates for office space at the beginning of 2019 when the measures would take effect.

GlobeSt.com: How should office tenants prepare?

Mahoney:  Despite the slower increase of rates the market has experienced in the last two quarters, office tenants should be prepared to allocate more funds toward overall occupancy costs should either measure pass.

GlobeSt.com: What is the likelihood that either measure will pass?

Mahoney: The Universal Childcare for San Francisco Families only needs a simple majority to pass because the measure met signature requirements for placement on the ballot. On the other hand, the Housing for All measure would need a two-thirds majority approval. If both are approved, the measure with the most votes will be adopted.

GlobeSt.com: What are the benefits of the proposals? Are there any potential downsides, other than higher rent?

Mahoney: At first glance, the benefits of either measure would positively impact the city by funding much-needed causes. However, both proposals allow for some funds to go into the city’s general fund, meaning the taxes collected could be used for purposes outside of the original mission.