S.F. Office Developers Grapple With Trickle Of Tenants, Economic Unease

As San Francisco's office market hobbles away from the pandemic months that emptied its once-bursting downtown towers, developers and architects are looking for ways to appeal to the tenants that remain and the lenders that hold the purse strings.

Adaptability in underwriting and developing new office product in the San Francisco market looks to be the wave of the future, as lenders hesitate to underwrite office construction that isn’t built with flexibility or conversion in mind.

“What are we going to do as engineers, designers, to attract people back to the office? Floor plate flexibility. We don’t know what the use type will change to, we don’t know what the next pandemic is,” Clark Pacific Senior Product Developer Blake Roskelley said at the Bisnow Bay Area Office Market Update event held at Levi Plaza.

A resurgence in the city's development pipeline for new office is likely several years out, but the commercial real estate industry wants to adapt as the market evolves into a new normal that involves a hybrid approach to office use.

“You can’t just produce office overnight,” Sares Regis Chief Operating Officer Yayu Lin said at the event. “This is very much looking to deliver office in 2026 or 2028. Judging by the traffic, return to office, at least three days a week, is in full force. Other companies are becoming more assertive about this return to office. We are still seeing a lot of commitment to build. I think there’s more to be said about what kind of office they are developing.”

Total leasing volume in the city slowed dramatically from Q2 to Q3, dropping from 2.2M SF to just over 641K SF in Q3, according to Transwestern’s new San Francisco office market report. Year-to-date, leasing velocity of 6.3M SF beat 2021 by 19.9%, but was still 29.8% lower than the five-year average. Overall office vacancy was 22.2% in the third quarter.

And, a dip in venture capital funding combined with a turbulent financial market has hit common capital sources for tech companies.

“The IPO market is dead this year. The valuations are down,” Newmark Vice Chairman Grant Lammersen said.

While a common refrain is that a recession would spur more employees back into the office, under the assumption that employers will regain the upper hand in determining where work should happen, opinions are mixed on the ultimate good such a power dynamic would have for the industry’s overall economic performance.

“There’s a narrative that recession will adjust the employee-employer balance. I think that’s true to a point, but that operates under the assumption that employers want to be back in the office, and I don’t think that’s necessarily true,” Strada Investment Group Vice President Kathryn Hofstetter said.

“Recession means higher unemployment rates and less office occupancy in general.”