SF office market shows first signs of turning the corner

The San Francisco office market is showing signs of life, with market activity poised to reach its highest level since the pandemic, according to a first-quarter report from brokerage CBRE. 

Vacancy is still at its highest point ever, 36.7 percent, or 39 percent when subleases are included. But the rise of tenants looking in the marketplace now should begin to turn into an increase in signed leases in six to 12 months, according to Colin Yasukochi, executive director of CBRE’s Tech Insights Center. 

“The San Francisco office market is beginning to transition out of its four-year downturn,” he said in a statement. “While it will take many years to rebalance supply and demand, we are starting to see positive signs.”

In the first quarter of 2024, there were 6 million square feet of tenant requirements, meaning active tenants in the market looking for space. That figure was up from 4.2 million last quarter and 3.4 million a year ago. Several large tenants have leases expiring in 2025 and 2026, which is what has led to the uptick, according to the report. 

Demand was at its peak — 6.8 million square feet of tenant requirements — in the first quarter of 2020, just before the pandemic kicked off the ongoing work-from-home trend that has left downtown buildings nearly half empty. 

Most companies have now committed to hybrid work schedules with in-office presence two to four days a week, and additional mandates are unlikely to have a big impact on office attendance at this point, Yasukochi said. 

“Rather, a booming economy will compel more people to want to be in the office and be better connected to the next growth cycle,” he said.

Activity rebound

Yasukochi predicted that market activity in 2024 could reach its highest level since 2019, with AI companies leading the way. In the first quarter, leasing activity was about 1.3 million square feet, slightly less than the same quarter last year, but is on track to exceed 6.5 million square feet for the full year. 

Artificial intelligence companies were responsible for 28 percent of total leasing activity in 2023 and they continue to be a “significant source of demand” in 2024, he said. 

“The AI industry is centered in San Francisco and will likely be a catalyst for broader tech industry and citywide economic growth, although that may take a few years to manifest itself,” Yasukochi said.

Fintech firm Adyen signed the biggest lease of the quarter, subleasing 150,000 square feet from Pinterest at 505 Brannan Street. 

The biggest direct lease of the quarter was a nearly 60,000 square foot deal at 525 Market Street, about a block from Salesforce Tower, where law firm Goodwin Procter will move in, according to the report. A rep from the Boston-based global firm confirmed the new lease is for 11 years. It currently has its San Francisco offices on the 28th floor of 3 Embarcadero Center, but the lease is up at the end of 2024. 

“We did a strategic review of our current space and alternative locations which resulted in our decision to relocate to 525 Market Street where we will have the opportunity to build out and design  new space to foster collaboration and creativity,” according to the rep.

Only two major downtown buildings changed hands in the first quarter, as sales remain few and far between, and continue to be led by San Francisco-based investors. Strada Investments closed on 201 Spear Street for $67.3 million, or about $266 per square foot. It last sold for nearly twice that in 2013. 

Johnny Ive’s LoveFrom bought a historic building in Jackson Square for $60 million from Clint Reilly, owner of the San Francisco Examiner. Ive paid nearly $1,700 per square foot — certainly a premium compared to other recent trades — but it adds to the former head Apple designer’s five other holdings on the block in the popular neighborhood, where vacancy rates are slightly below the citywide average. 

The nearby North Financial District was the most popular spot in the city in the first quarter, according to the report, accounting for 61 percent of the deal count and 45 percent of all square footage leased. Deals in the neighborhood average 8,500 square feet, about a quarter smaller than the office space average size citywide.

High-rent districts

Direct asking rents are by far the highest in Mission Bay/China Basin, which is asking $107 per square foot despite the area’s nearly 50 percent availability. The high rents and high vacancy can be attributed to new construction that delivered empty in the life science-heavy neighborhood, according to Yasukochi. 

The average asking rent citywide was down slightly to $68.55 in the first quarter, with Class A up slightly to $76.57, due in large part to the expensive asks in Mission Bay. South of Market continues to struggle, with total availability of more than 42 percent and asking rents at under $60, though it was one of the few neighborhoods to show positive net absorption in the first quarter. 

South of Market West, near Civic Center, is even more challenged, with average rents below $50 and vacancy above 50 percent. 

“We are seeing more office tenants sign new leases — a sign they are more willing to recommit to the city,” Yasukochi said. “However, this dynamic is still somewhat tenuous as employers and their employees still have concerns about public safety and the cost of doing business.” 

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