Moody’s dings San Francisco’s once top credit rating, citing hybrid work

Stubbornly high office vacancies resulting from the shift to remote work led by the city’s tech firms has knocked San Francisco’s credit rating off its peak.

Moody’s Ratings has downgraded the city’s credit to Aa1 from Aaa, the highest rating possible, citing the economic impact of a shift to fewer office hours, higher office vacancy and less foot traffic and local spending, the San Francisco Business Times reported.

“The sea change in office employment to a hybrid model and reduction in commuting to the city’s office core have led to reduced economic activity, very high vacancy rates, and depressed rents,” Moody’s said in a statement that was first reported by Bloomberg Law.

Market players use credit ratings to judge the financial risk of acquiring municipal bonds, a form of debt, from San Francisco.

The city uses that debt to fund public infrastructure and other capital projects. A downgrade can jack up the cost of that debt for the city.

The Aa1 rating still suggests San Francisco’s obligations are high quality and low credit risk, according to Moody’s. Its former Aaa indicates “highest quality” and minimal risk.

Fitch and S&P Global, the two other major ratings agencies, give the highest possible credit ratings for San Francisco.

This spring, S&P downgraded its overall outlook for San Francisco from “stable” to “negative,” indicating the city’s credit rating could be lowered, citing the same challenges as Moody’s.

The downgrade from the New York-based rating agency comes as San Francisco continues to grapple with a soaring number of empty offices in its Downtown, where vacancy in the third quarter ending last month hit a record 37.3 percent, according to CBRE.

The vacancies, coupled with higher interest rates, has led to a post-pandemic collapse of the San Francisco office market, resetting the value of the city’s once robust commercial properties — some by half.

Many landlords of whom have subsequently appealed the taxable value of their office buildings, according to the Business Times.

Wide-spread value reductions would spell trouble for San Francisco, where property taxes have been the largest single contributor to its general operations coffers.

The city now faces a two-year deficit of $789 million — projected to grow as other Downtown revenues, such as business taxes, remain well below their prepandemic levels.

— Dana Bartholomew