Office vacancy in San Francisco rises to new record at 37%

“Incremental” uptick suggests market is approaching stability, report finds

Office vacancy in San Francisco Rises to New Record at 37%
(Illustration by Priya Modi for The Real Deal with Getty)

The once-filled office buildings across San Francisco grow even emptier. The new vacancy record: 37 percent.

Office vacancy in San Francisco will rise a projected 0.3 percent to 37 percent in the second quarter, from 36.6 percent in the prior period, the San Francisco Business Times reported, citing figures from CBRE.

Office availability across the 89.2 million-square-foot market also are predicted to tick up 0.3 percent in the three months ending in June to 39.4 percent.

Both rates shatter San Francisco office records, which has seen vacancy and availability spike since a pandemic shift to remote work, starting in early 2020. Months earlier, vacancies had hit an all-time low of less than 5 percent.

Some saw the slight increase in vacant or available offices as good news for San Francisco.

Colin Yasukochi, head of the CBRE Tech Insights Center in San Francisco, said the “incremental changes” to vacancy and availability suggest the city’s office market may have nearly stabilized.

That means the rise in empty offices could come to a halt, along with slipping rental rates.

Net absorption, a measure of the change in space occupied by office tenants, was negative 442,000 square feet in the second quarter, with tenants vacating more offices than they lease.

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And that doesn’t include the 320,000 square feet that Google is expected to give up at One Market Plaza at the end of its lease next April, according to the Business Times.

“San Francisco usually has a very quick rebound economically in its real estate market, so we do expect to see that, probably within a couple years’ time,” Yasukochi told the newspaper. “But if we’re at 37 percent vacancy now, two years from now, that vacancy is still going to be a very high number.

“That doesn’t mean leasing activity and demand won’t make it feel a lot healthier than it does today.”

A bright spot includes the amount of office space tenants sought from April through June, which rose to 6.9 million square feet, up from 6.4 million square feet in the first quarter and 4.5 million square feet a year ago.

But tenants seeking space are only expected to generate 10 percent in net new demand given that many are downsizing or simply renewing leases for the same footprint, Yasukochi said.

That compares to 60 percent net new demand generated by the 7 million square feet tenants were looking for in 2019, he said, because most of those space requirements were driven by growth and not lease expirations.

The artificial intelligence sector is on the upswing, Yasukochi noted, as it’s responsible for a quarter of all leasing activity this year. In May, Scale AI signed the largest deal of the year, taking 180,000 square feet in a sublease from Airbnb at 650 Townsend Street.

— Dana Bartholomew

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