San Francisco's Governance Reforms and Business-Friendly Turn: A Catalyst for Real Estate and Tech-Driven Recovery

San Francisco, long a symbol of innovation and cultural dynamism, is undergoing a quiet but profound transformation. In the wake of the pandemic, the city has embraced governance reforms that are reshaping its economic landscape, positioning it as a magnet for capital and talent. At the heart of this shift is Proposition M, a 2024 voter-approved overhaul of the city's business tax system, alongside complementary programs like the Advance Written Determination (AWD) initiative. These reforms are not just about simplifying compliance-they're recalibrating incentives for real estate development and tech sector growth, fueling a post-pandemic urban revival.

A Tax System Reimagined: From Payroll to Sales

For decades, San Francisco's business tax structure relied heavily on payroll-based apportionment, a model that disproportionately burdened labor-intensive industries while under-taxed companies with high sales volumes but remote workforces. Proposition M, passed in November 2024, flipped this script. Effective January 1, 2025, the reform shifted the apportionment methodology for most industries to a 75% sales/25% payroll formula, aligning tax liabilities with market-based revenue rather than employment costs.

This change has had immediate and far-reaching effects. For tech firms and professional services, which often operate with distributed teams, the new rules mean a more equitable tax burden tied to their local economic footprint. Conversely, small businesses-particularly in sectors like hospitality and retail-benefit from a $5 million gross receipts tax exemption, up from $2.25 million. The Golden Gate Restaurant Association estimates this alone will exempt over 2,700 small businesses from the gross receipts tax.

The AWD program, introduced alongside Prop M, further streamlines compliance. By allowing businesses to seek advance tax guidance from the Office of the Treasurer & Tax Collector, the initiative reduces uncertainty and administrative friction. For capital-intensive industries like real estate and tech, this predictability is a boon, enabling better long-term planning and investment.

Real Estate: A Tale of Two Markets

San Francisco's real estate sector is a microcosm of the city's broader economic duality. The multifamily residential market is rebounding, with vacancy rates plummeting to 5.1% in mid-2025- the lowest in over a decade-and asking rents rising 4.9% year-over-year. This recovery is driven by a return to population growth and hiring in the tech sector, particularly in AI and cloud computing. Developers in neighborhoods like SoMa and Mission Bay are capitalizing on this demand, with luxury housing projects seeing price surges.

Meanwhile, the office market remains in flux. Vacancy rates hover at 22.8%, but early signs of stabilization are emerging. Tech giants like OpenAI and Anthropic have signed large leases in recent quarters, signaling confidence in the city's long-term potential. The tax reforms may further tilt the balance: by increasing tax liabilities for out-of-state businesses with significant San Francisco sales, Prop M could incentivize companies to consolidate operations locally, boosting demand for commercial real estate.

Tech Sector: A Surge in Capital and Innovation

The tech sector's resurgence is the linchpin of San Francisco's revival. In Q1 2025 alone, California tech startups raised $58.5 billion, a 30% increase from the previous quarter and a 256% jump from Q1 2024. This surge is concentrated in enterprise applications, infrastructure, and life sciences, with San Francisco-based firms accounting for 84% of all funding.

Federal and state tax reforms are amplifying this momentum. The reinstatement of 100% bonus depreciation for qualified capital investments-such as AI infrastructure and cloud servers-has slashed upfront costs for tech firms. Similarly, the One Big Beautiful Bill Act (OBBBA), signed in July 2025, allows immediate deductions for R&D expenses, a critical incentive for companies in high-cost innovation sectors.

Prop M's market-based tax rules also play a role. By shifting the tax base to sales, the reforms align with the digital-first nature of tech businesses, which often operate across state lines. This creates a more level playing field, encouraging firms to expand their San Francisco presence without fear of disproportionate tax burdens.

Urban Revival and Capital Returns: A Symbiotic Future

The interplay between governance reforms and economic activity is already yielding measurable outcomes. For real estate investors, the combination of rising rents, stabilization in the office sector, and tax predictability is creating a compelling value proposition. In SoMa, for instance, mixed-use developments are seeing capitalization rates improve by 1.2% year-over-year, reflecting renewed confidence.

For tech investors, the story is equally promising. The $1.14 billion raised by real estate tech startups in 2025- led by platforms like Rentberry and Span.IO-highlights a shift toward tech-driven property management and energy efficiency. These innovations not only enhance returns but also address San Francisco's affordability challenges, a critical factor for long-term urban viability.

Conclusion: A City Rebuilding for the Future

San Francisco's governance reforms are more than regulatory tweaks-they're a strategic pivot toward a business-friendly, innovation-driven economy. By simplifying tax compliance, recalibrating incentives, and aligning with the realities of a digital-first world, the city is attracting capital, talent, and optimism. For investors, the message is clear: San Francisco is not just recovering; it's repositioning itself as a hub for the next era of urban and technological progress.