San Francisco office vacancies up across board

San Francisco office landlords have scored a few big deals of late but the office market continues to struggle overall, with vacancies on the rise.

The volume of office leases in the city rose to 1.7 million square feet in the second quarter, a gain of 400,000 square feet from the previous three months, the San Francisco Business Times reported. But steady exits by tenants left 22.4 percent of office space vacant, an increase of half a point.

The year began with beauty giant Sephora leasing 286,000 square feet at Salesforce Tower West, the biggest new lease deal during the pandemic.

The second quarter ended with Google’s sublease of a 300,000-square-foot building in South of Market, a major bet on San Francisco, with Wells Fargo’s renewal of 622,000 square feet the largest re-up in two years.

Good signs, market insiders say, though the gains aren’t enough to offset the losses as San Francisco contends with market conditions from remote work to the risk and uncertainty of inflation.

Robert Sammons, regional director for Cushman & Wakefield, told the Business Times it’s seen San Francisco office vacancies hover “over the 20 percent mark for the past five quarters” and staying flat at 21.7 percent in the second quarter.

Cushman has “noticed that a number of tenants have put their requirements on hold,” Sammons said, and are “waiting to see how things shake out around the economy.”

The high-end building market will continue to outperform commodity buildings as office tenants increasingly seek out quality spaces, industry analysts say. But this trend is unlikely to put much of a dent in the overall market supply as more space was vacated than leased.

The vacancy rate for high-end, Class A buildings is currently at 11.9 percent which is “less than half of their counterparts,” Alexander Quinn, JLL’s director of research for Northern California, told the business journal. The vacancy rate among Class C buildings, or older buildings in less desirable locations, is 37.2 percent.

Trophy buildings saw asking rents drop by 8.6 percent from pre-pandemic highs, compared to a 25 percent drop in office rents citywide.

While overall rents dropped slightly from $79.79 in the first quarter to $79.18 in the second, rates for Class A spaces increased in the second quarter to $96.20 per square foot, from $95.75 per square foot, according to JLL. Buildings with view space on average have 25.5 percent higher asking rents than the rest of the market.

Some 2 million square feet of subleases are set to expire through the end of 2023.

[San Francisco Business Times] – Dana Bartholomew

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