San Francisco’s downtown has its highest office vacancy rate ever, and millions of additional vacant square footage could hit the market in the next few years.
About 700 office leases are likely to expire in 2023 and another 600 are up in 2024 in the Financial District alone, said Avison Young’s insights and innovation head Dina Gouveia, for a total of about 10 million square feet of office space. In 2025 and 2026, another 10 million-plus square feet are likely to expire.
Between 2022 and 2026, the “lion’s share” of expiring leases citywide will be in tech, which Gouevia forecasts as 7 million square feet. Tech is followed closely by financial services, including insurance and real estate, with 6 million square feet expiring, Gouveia said via email. Law firms had the third-most expiring square footage at just under 1.8 million square feet. In total, more than 17 million square feet of office space is due to expire, according to Avison Young’s AVANT system, which only tracks leases over 20,000 square feet. The current total office inventory in San Francisco is more than 87 million square feet, with 1.2 million more under construction.
Gouveia did not predict what percentage of companies would downsize, stay on or move to similarly sized offices, but she said in an earlier interview that “blend and extend” leases, where companies negotiate a new rent to stay in the same space, had been a popular tactic for tenants with expiring leases this year.
Avison Young agent Nick Slonek said via email that most tech firms were “struggling” to get their employees back downtown, adding that Uber recently mandated Tuesdays and Thursdays as in-office days, with another mandatory day of the employee’s choosing.
“How does this impact their space at the time of lease expiration?” he asked. “Generally, most tech firms would renew for less space unless aggressive hiring or re-imagining their space to have more resort and event qualities would justify renewing at the same footprint.”
Some big tech firms with more than 100,000 square feet are “looking to ‘re-pot’ entirely,” he added, with a prime location, amenities and single-occupancy space on the tops of their lists.
Even before their leases expire, downsizing tech companies have flooded the sublease market with hundreds of thousands of square feet of unused office space as they embrace the work-from-home trend. Tech companies are responsible for the biggest subleases on the market, according to Gouveia. Airbnb is leading the way with nearly 300,000 square feet of available space at 650 Townsend, as well as 150,000 square feet at the former Dolby Lab space it occupied on Brannan before embracing a new “work from anywhere” ethos. Uber moved its headquarters to Chase Center and has been looking to sublease almost 180,000 square feet at 1455 Market, where Block, formerly known as Square, has also closed its headquarters and said it will not renew its 470,000-square-foot lease when it expires next year.
Colliers data head Derek Daniels said sublease space was taking an average of one year to rent out, double the length of time from before the pandemic, and agreed that “some of the larger tech users” are responsible for much of those unused offices.
In a recent third-quarter office report showing the highest-ever vacancy rate downtown, Daniels called out the already increasing vacancy rates in the North and South financial districts, which have seen considerable tech downsizing since the pandemic and are now at 18 percent vacancy even for in-demand Class A space, up from 16 percent last quarter. Of the city’s total 3.5 million square feet of negative net absorption through the third quarter in 2022, 65 percent was in the Financial District.
Daniels estimates 30 to 40 percent of tech companies are looking to downsize, and called the number of expiring leases in the Financial District “a potential concern.” He also said it was “reassuring” that some big tech employers have maintained their footprint in the city and that San Francisco’s low unemployment, increasing office-using-jobs totals — nearly 8 percent higher in July than before the pandemic — and continued venture capital investments were positive indicators for the future of the market.
“Companies may not be looking for as much space,” he said. “But the numbers still point to pent-up demand that should be seen in the office space at some point. It’s just a matter of when.”
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