Forecast: office vacancy in SF’s Downtown could grow to 50 percent

The high vacancy rate in Downtown San Francisco could grow worse in the next couple of years, with up to half its offices empty of workers in some districts, the city’s chief economist says.

San Francisco began the year with 22 percent of its offices vacant, which compared with rates typically in the single digits before the pandemic. Now the market could grow worse in parts of Downtown as office leases expire by 2024, the San Francisco Business Times reported.

The dire forecast was made by the city’s Chief Economist Ted Egan while addressing the city’s Planning Commission.

San Francisco Chief Economist Ted Egan (SFHAC)

“Even the space that is not yet vacant, much of it is becoming vacant,” Egan said. “And if there isn’t a return to office and renewal of office demand, that’s going to create a problem in all of those sub-markets.”

His projections were gleaned from real estate services firm JLL, which analyzed the amount of direct and sublease space currently available as well as leases set to expire in the coming years.

He predicted a much higher vacancy risk by 2024 that could leave close to half of the office inventory in some downtown sub-markets vacant.

San Francisco’s Downtown could see vacancy ranging from 35 percent to 50 percent in certain areas, assuming that current market conditions continue and office tenants decline to renew existing leases or sign new ones, Egan said.

JLL analysts were more hopeful.

Alexander Quinn, JLL’s director of research for Northern California, said while leasing activity has not kept up with availability since the start of the pandemic in early 2020, such a scenario is “highly unlikely” to play out.

He said companies have continued to lease space throughout the pandemic, albeit at a much lower rate than in the years leading up to it.

“We’ve seen leasing activity of over 1 million square feet this quarter and 6.3 million square feet last year during the depths of the pandemic,” said Quinn, adding that while the market is facing unprecedented challenges, “we are not at the edge of a cliff.”

In the data presented to the commission, Mission Bay faces an office vacancy risk of 43.1 percent in 2024, which is on par with Mid-Market’s vacancy risk at 43.4 percent.

The South Financial District, which roughly spans an area south of Market Street from Montgomery Street to the Embarcadero, may see a vacancy risk of 34.2 percent over the next two years. The North Financial District, located north of Market Street, could see vacancy rise to 41.4 percent. Meanwhile, the North Waterfront could see vacancy rise to close to 40%.

More than half — almost 54 percent — of the office space in Jackson Square could be vacant by 2024 given the absence of new lease deals or renewals.

The submarkets with the lowest projected vacancy risk are the Van Ness Corridor (23.2 percent), Union Square (28.2 percent) and Showplace Square (26.5 percent), according to the Business Times. The latter is home to tech giants like Airbnb, which over the past year has listed more than 600,000 square feet, with some leases expiring over the next four years, for sublease.

Quinn said that year-to-date, the city has seen approximately 2.7 million square feet in leasing activity. The city is projecting that 33 percent of its workforce will be reduced to remote work permanently.

“Trophy buildings and buildings with meaningful waterfront views have held in pricing,” said Quinn. “It shows the long-term resiliency of higher quality assets that will achieve healthy occupancy levels indefinitely.”

[San Francisco Business Times] – Dana Bartholomew

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