Offices in San Francisco’s Financial District are at the highest risk of default in the nation, due to a combination of high vacancy, days on market and rents, “indicating a significant financial burden on property owners,” a new study shows.
The Kaplan Group wrote the report, which covers the financial districts of 18 U.S. cities, because the L.A.-based commercial collection agency “has a vested interest in understanding economic trends that could impact businesses and their ability to meet financial obligations,” according to a Kaplan rep. The criteria to calculate risk were “chosen based on key economic indicators” like “vacancy rates, rental costs and office space availability, which collectively provide a comprehensive view of the financial health and potential loan default risk in each district.”
The report, authored by Kaplan President Dean Kaplan, focused on financial districts because “these areas are central hubs for economic activity, housing the headquarters of major financial services firms such as banks, insurance companies and other finance-related corporations. This focus allows us to understand the unique dynamics of office space demand and supply in some of the most economically significant parts of major cities,” according to the report.
The data put San Francisco’s Financial District, which includes both the North and South Financial Districts, at the highest risk of default, followed by Seattle and Houston. Miami had the least risk, due to its low vacancy rate and relatively quick turnaround time on empty offices.
Nearly all the financial districts in the study have a harder time filling their vacant offices than the country at large. The national median days on market is 334 days, but in financial districts the median is nearly twice as much: 599 days. That difference was one of the biggest surprises in the study, according to the rep.
The trend away from financial district core markets “may indicate that these central city areas are losing their attractiveness,” according to the report, which suggests that converting vacant offices into “residential spaces, coworking environments or other mixed-use developments” could help mitigate the risk of default as well as aid in long-term economic sustainability.
Among big cities, only Miami, Jacksonville and Philadelphia DOMs fall below the 334 national average. The fact that some cities are performing better than the national median was also unexpected, given the general trend in financial districts, according to the Kaplan representative.
Though San Francisco had the highest vacancy rate and the highest rents, the city’s days on market were also relatively low at 414 days, just slightly higher than second-most-expensive city New York. Los Angeles and Chicago, while less expensive, had a median DOM of 672 and 642, respectively. Hartford, Houston and Des Moines were among the least expensive markets and were also among the highest DOMs, with Hartford the highest at over three years.
“This suggests that lowering prices may not necessarily reduce the median days on market, and these offices may need to adopt new strategies to avoid remaining vacant,” according to the report, which also found that offices with the largest square footage are the hardest to rent out.
San Francisco office market experts have said that tenants tend towards smaller spaces, and that many companies signing leases today are not in tech, but rather the financial services, insurance and legal firms that tend to congregate in the Financial District. But the biggest movers in the office market this year have continued to be tech companies operating outside the Financial District, from X leaving Mid-Market for the South Bay to Open AI taking another 350,000 square feet in sublease space off the market in Mission Bay.
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