Commercial Landlords Are Down—Now California Wants to Finish the Job.

California’s Senate Bill 789 is a vacancy tax pitched as a cure for downtown decay. But tenants should ask: what happens when you tax the landlords out of existence?

The proposed bill would slap a $5-per-square-foot annual tax on commercial properties vacant for 182+ days, making it the first statewide commercial vacancy tax in the U.S. Supporters claim it will push landlords to “activate” blighted properties.

Let’s be honest—property owners want to lease their space. That’s never been the issue. What we’re really dealing with are the ongoing aftereffects of a hybrid-first world, compounded by still-elevated interest rates. In that context, are we just kicking commercial landlords while they’re already down?

Read on, in this article you’ll learn:

• Why empty downtowns are draining city budgets and fueling a cycle of decline.
• How property owners are already bleeding cash trying to fill space in a tough market.
• Why California’s vacancy tax risks making the problem worse, not better.
• The real market forces behind vacancies that no tax can fix.

Downtowns Stuck in the Urban Doom Loop

Empty space is not good for anyone.

Landlords bleed cash by the day. Nearby property values drop. And cities lose out on their biggest income stream: property taxes.

With high commercial vacancy levels, cities collect less revenue. That means less money for street repairs, public safety, transit, and sanitation. As infrastructure crumbles and crime rises, more tenants bail. The result? Fewer jobs. More closures. Declining tax rolls.

Let’s be clear: downtowns are struggling.

This is the urban doom loop in motion—and cities overly reliant on property taxes as income are the most vulnerable.

Take New York City, which in 2025 property tax revenue was projected to reach $34.24 billion, making it the city’s largest single source of tax revenue (approximately 30–40% of the city’s total revenue).

Boston, Chicago, and San Francisco are in similar positions: overly reliant on commercial property tax income that is drying up.

And it comes back to sky-high and persistent commercial vacancy rates:

• San Francisco: 36.6%
• Los Angeles: 30.4%
• Chicago: 27.5%

“The longer space stays empty, the harder it is to lease—and the more damage it does to everything around it.”
— Victor Calanog, Head of CRE Economics, Moody’s Analytics

Can Landlords of Commercial Properties Give Any More?

Property owners aren’t sitting on space out of greed. They’re buried under interest-only loans, escalating operating expenses, and tenants negotiating for triple the standard pre-pandemic concessions just to sign a lease.

Largely, they have already thrown every tool they have at the vacancy problem:

• Triple the usual tenant improvement allowances
• Up to 12–18 months of free rent
• Buildouts customized to the inch, even covering soft costs
• Flexible lease terms with heavy renewal options

Even so, they are still struggling to fill space. So much so that, it has largely become not worth it for them. Commercial real estate, which was long thought of as a rock-solid, investment, is now a failing asset for the first time.

Many landlords are already in triage mode. Some are defaulting. Others are handing back keys and walking away from underwater assets. In these cases, there is no more strategy—it’s surrender.

Defaults and distress are widespread:

• Nearly one-third of all office CMBS loans nationally are distressed
• In Chicago, over 75% of CMBS office loans are in distress
• In Los Angeles, foreclosures have doubled since 2023

We’re facing a systemic issue. While it’s clear that the empty space problem needs to be addressed, is a vacancy tax really the right solution?

“You’re penalizing landlords who are doing everything right but still need 12 to 24 months to bring a space back online,”
— Ed Sachse, President, KWP Real Estate

Commercial Vacancy Tax

This brings us to the heart of the matter: California’s Senate Bill 789. Proposed by State Senator Caroline Menjivar, the bill would impose a $5-per-square-foot annual tax on commercial properties left vacant for 182 days or more within a calendar year.

At face value, the bill aims to “activate” empty commercial spaces, combat economic decline, and funnel revenue into the state’s “Dream for All” fund to support first-time home buyers and address homelessness.

But the reality is far more complex. Leasing commercial space in today’s market is neither quick nor cheap.

For example, filling just one 5,000-square-foot office space can easily cost property owners upwards of $200,000 in tenant improvements, commissions, legal fees, and city permits — and the process often takes 12 to 24 months in California’s highly regulated cities.

“This would only drive more properties into receivership and reduce capital available to reposition them.”
— Victor Coleman, CEO, Hudson Pacific Properties

Unintended Consequences of a Tax

In a market burdened by high costs, long leasing cycles, and unprecedented challenges, a vacancy tax threatens to worsen—not solve—the vacancy crisis. If the goal is to revive downtowns and stabilize commercial real estate, policymakers need solutions that support landlords and tenants alike, rather than penalize those already fighting to keep the lights on.

Without that balance, the vacancy tax risks becoming just another blow in the urban doom loop, deepening vacancy woes and eroding the economic lifeblood of California’s cities.

What We Learned from San Francisco

San Francisco’s vacancy tax offers a cautionary tale for California’s Senate Bill 789. Passed in 2020 and implemented in 2022, it imposes charges up to $1,000 per foot of street frontage after three years of vacancy—an aggressive rate designed to compel property owners to lease or sell.

Yet, the reality on the ground tells a different story:

• Fewer than 200 storefronts paid the tax in its first year, despite thousands of vacant properties, highlighting major issues with compliance.
• Enforcement has been confused and inconsistent, creating uncertainty rather than clear incentives.
• Downtown remains littered with “For Lease” signs, signaling that the tax has failed to meaningfully reduce vacancy rates.
• Critically, the tax excludes the central business district, the very area hit hardest by vacancies, which undermines the policy’s core intent.

Further complicating matters, a 2019 economic impact report from San Francisco’s controller’s office openly acknowledged that commercial vacancies often stem from factors beyond landlord control, including:

• The explosive rise of e-commerce, which permanently reshapes retail demand.
• Shifts in workforce habits, particularly the rise of remote and hybrid work reducing office needs.
• Zoning laws and permitting delays that hinder rapid repurposing or redevelopment of spaces.

These forces, not landlord greed or negligence, are the primary drivers of vacancy—and no tax can simply override such deep structural challenges.

San Francisco’s experience shows that vacancy taxes, while politically appealing, may simply add another layer of financial pressure on property owners already stretched thin—without addressing the root causes.

The key takeaway? Without nuanced policies that tackle market commercial vacancy realities and regulatory barriers, vacancy taxes risk becoming symbolic gestures that do more harm than good.

Tenant Takeaways: Vacancy Taxes Don’t Fill Space—They Shrink Opportunity

1. Vacancy taxes won’t fix long-term vacancies.
   The proposed tax targets commercial properties vacant for more than six months in a calendar year—but doesn’t address the true causes behind prolonged vacancies: hybrid work, permitting delays, and lack of tenant demand.

2. Higher taxes = fewer lease options.
   Property owners already face rising operating costs and cratering property values. An annual tax on vacant commercial properties may push more landlords into default, leaving fewer viable commercial buildings on the market.

3. Empty storefronts don’t mean lazy landlords.
   In places like San Francisco, many vacant commercial properties remain so due to red tape—conditional use permits, planning commission delays, and complex city processes. Penalizing landlords won’t accelerate leasing if tenants can’t navigate city processes either.

4. Taxing property owners means taxing the market.
   When property taxes and vacancy penalties rise, so do higher rents. Small businesses and office tenants bear the brunt—especially in neighborhood commercial districts hit hardest by retail vacancies and shrinking tax revenue.

5. You can’t legislate demand.
   Empty commercial space is often a sign of economic friction, not apathy. Unless real estate demand returns, these taxes won’t generate leasing—they’ll just make vacant properties more toxic.

6. Watch for unintended consequences.
   The tax collector may come for properties vacant due to natural disasters, slow environmental reviews, or legal disputes. And applying a square foot or linear foot metric—without nuance—can trigger takings clause concerns over fair use and ownership rights.

Bottom Line:
Whether you lease office space or operate a storefront, remember: a tax that punishes empty properties doesn’t fill them. It shrinks supply, increases risk, and threatens to accelerate the commercial real estate collapse—especially in core markets like San Francisco.

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