Despite 35% Office Vacancy, San Francisco's Office Rents Still Above National Average

San Francisco ended one of the roughest years for real estate in more than a decade with more than a third of its downtown office space sitting empty.

Rents, as they do in high-vacancy situations, have dropped in the years since the pandemic rocked the city’s office market. But despite carrying one of the highest vacancy rates in the country, office rents in downtown San Francisco are still higher than the national downtown average.

The downtown San Francisco asking rent at the end of 2023 was $69.28 per SF. The average asking rent in downtown U.S. cities was $53.34 per SF. The average downtown Manhattan asking rent was $57.21, according to CBRE data. 

Rents in the wounded San Francisco office market remain elevated largely because owners are in many ways playing a waiting game.

“We’re in a situation where price was not going to affect demand, so if you lowered your price by half and no one showed up, that doesn’t necessarily benefit the property owner,” Colin Yasukochi, executive director of CBRE’s Tech Insights Center, told Bisnow. 

Plus, there are existing tenants to think about. 

“[If] they have tenants in their building paying a certain level of rent and if they lower it, other tenants could want that, too, and it could snowball,” Yasukochi said.

The downtown San Francisco office vacancy rate was 35.6% at the end of 2023, CBRE reported, with 1.25M SF of negative net absorption in the fourth quarter.

Analysts believe the vacancy rate will peak later this year as more leases are up for renewal and will likely result in smaller extensions or more vacated space.

“There will be ups and downs still this year, but [vacancy] should hit its peak, probably in the middle to second half of the year,” Yasukochi said.

By the end of the year, the economy should be improving and companies will be hiring more as a result, he added. 

With the Federal Reserve holding firm on interest rates in January, things remain at a bit of a standstill until rates fall.

“The high interest rates have been cutting away at company profits,” George Entis, senior research manager at Transwestern, told Bisnow.

For companies signing leases, there is a clear flight to quality, experts said. Mission Bay, which is one of two submarkets that posted positive net absorption in the fourth quarter, also has the highest asking rent in the city, Transwestern reported.

San Francisco’s office scene was hit particularly hard by the pandemic, as the many tech companies in the city were able to transition employees to a work-from-home model, cutting back dramatically on the need for office space. Even as those companies continued to hire, it didn’t lead to more leases.

“That didn’t translate to them taking more office space but instead a more hybrid and remote working environment,” Yasukochi said. 

Meanwhile, companies are embarking on level-setting measures in the new year, with Google, Levi's and Salesforce announcing layoffs. Nearly 4,000 jobs have been cut in the Bay Area so far in 2024, The Mercury News reported.

Alphabet, Google’s parent company, spent $1.8B exiting leases in 2023. Uber's lease expiration and WeWork's lease termination in downtown San Francisco accounted for more than 1M SF in negative absorption in Q4, Transwestern said.

Meta paid out more than $180M in 2023 to give back office space and shelled out $2B to get out of leases in 2022.

While some employers, like JPMorgan Chase, are calling employees back to the office full time, most are opting for a hybrid model. Nearly 80% of U.S. employers want employees in the office half the week, a CBRE survey found, and major tech players are paying big to get out of their space.

It isn't all gloom and doom, however.

Artificial intelligence represents a glimmer of hope for the downtown San Francisco office market and Bay Area. In Q4, OpenAI and Anthropic signed the largest leases, totaling more than 716K SF, according to Transwestern.

Venture capital funding in AI is still concentrated in the Bay Area, and San Francisco saw a slight uptick in funding at the end of 2023, data from Cushman & Wakefield shows.

San Francisco is responsible for 21% of the country’s VC funding, and generative AI funding in Q4 was 37.8% of the total VC funding in San Francisco-based companies, according to C&W.

AI could result in a growth cycle, Yasukochi said, especially as other platforms for AI are deployed across sectors beyond tech companies. 

“This wave of AI is like when the iPhone or mobile phone came out. That created a whole new set of business opportunities,” Yasukochi said.

That growth will be gradual, however, and is unlikely to completely solve downtown San Francisco’s office vacancy rate.

“Are they going to solve the problem? With 31M SF of vacant space? No,” Entis said. “But it’s the impetus for demand, so it will set an example for others to follow, especially in this ecosystem where you have a lot of new startup tech companies coming about.”

The next year or so could also bring a debt wave, with nearly $40B in loans set to come due, the San Francisco Business Times reported.

As the economy slowly levels later this year, vacancy rates and rents are expected to adjust, albeit slowly. And San Francisco’s office market has a lot of lost ground to make up for.

“It’s the most oversupplied it’s been ever, so it will take quite some time for it to return to a normal situation,” Yasukochi said. “We would have to cut vacancy in half at least to get to a more balanced market.”

That would take a few years. And for now, the vacant offices continue to present a challenge for the market.

“The amount of vacant space in S.F. is 17 empty Salesforce Towers,” Entis said. “That kind of captures the magnitude of the problem.”