Like most major metropolitan areas, the San Francisco office space market is still suffering from a significant downturn on the heels of the COVID-19 pandemic. The city saw negative net absorption this quarter and rising vacancy rates.
Rental asking rates stayed flat, mostly because San Francisco employers have struggled to get workers back into the office. Investment and construction activity has stalled, with relatively few projects in the pipeline.
Overall, experts expect the downturn to continue in the near future until there is a sustained push to return workers to the office.
General Area Overview & Demographics
Located in central California, San Francisco is the fourth largest city in the state and boasts a current metro population of 3,318,000.
The median age in the city is 38.8, and the median household income is $119,136. San Francisco has long been a global economic center and is home to Silicon Valley, the globe’s center for technology and software. Some of the world’s largest tech companies are based in San Fancisco, including Apple, Google, Twitter, Facebook, and more.
The bay area features a temperate Mediterranean climate, with warm summers and mild winters. Average temperatures throughout the year hover between 50 and 80 degrees F.
San Francisco is a diverse city with a highly educated population and has the third-highest average income in the nation. This also means the housing and renting market in San Francisco is among the most expensive in the US. San Fran is a cultural center for the arts and has been a major center for various cultural movements in the past 60 years. The city is divided into 36 distinct neighborhoods across 11 districts.
Summary of San Francisco Office Space Performance in Q3 2022
San Francisco registered negative 1.5 million square feet of absorption in Q3 2022, continuing a general year-long downtrend in rental activity. The most significant negative absorption occurred in the South Financial District, which accounted for nearly 800,000 square feet.
Most of this negative absorption was due to downsizing from tech companies and a general lack of demand for office space. Although many US cities have returned a large portion of their workforce to the office, San Francisco still trails behind in return-to-office rates, and office space utilization is well below capacity.
Despite relatively low unemployment at 2.30%, the San Francisco office space market saw record-high vacancies and low sales activity in Q3 2022. With relatively few construction projects in the pipeline, San Francisco’s lackluster market performance is expected to continue in the near future.
What Are Office Space Rents Like in San Francisco?
Rents for office space in San Francisco slightly rose to $75.22 in Q3 2022 from $74.17 in Q2 2022. Despite the slight increase in actual rental rates, effective rental rates are down 2.4% after factoring in tenant improvement allowances.
Average asking rates for Class A office space showed a slight decline from $79.42 per square foot in Q2 2022 to $$77.73 per square foot in Q2 2022. Asking rates for Class B office space rose from $61.25 per square foot in Q2 2022 to $61.56 per square foot in Q3 2022.
Submarkets that had the highest average asking rates were South Financial, North Financial, Yerba Buena, and Potrero East, at $80.02, $79.39, $76.31, and $73.37 per square foot, respectively.
Purchase & Leasing Activity
Purchasing and leasing rates in the San Francisco office space market stalled this quarter, with only four sales transactions taking place. The city saw the lowest sales activity in over a decade, and investment activity in San Francisco capital markets was lower than pre-Covid levels.
The lack of sales and leasing activity reflects low demand and a general uncertainty among investors. The Fed hiked interest rates for the seventh time in 2022, making it more difficult for investors to justify borrowing money.
Notable Office Space Deals in San Francisco in Q3 2022
Despite general downtrends in market activity, San Francisco saw a handful of major office space leases and sales, including:
- Planet Lab’s 72,000-square-foot lease at 645 Harrison Street;
- Asana Inc.’s 70,700-square-foot lease at 680 Folsom Street;
- Joseph Lee’s 23,700-square-foot purchase at 1210 Market Street;
- Epic Church’s 19,548-square-foot purchase at 414 Brannan Street;
- Farella Braun’s 34,088-square-foot lease at 1 Bush Street; and
- AER Worldwide’s 16,668-square-foot lease at 1076 Howard Street.
The two areas that saw the majority of these deals were the North Financial District and SOMA East/West submarkets.
New Office Space Development Activity in San Francisco in Q3 2022
Construction for office space in San Francisco is up, with 834,100 square feet of construction underway—up from 600,000 square feet in Q2 2022. Experts project another 600,000 and 234,100 square feet of construction will be added in 2023 and 2024.
Two of the most notable construction projects in San Francisco are 600,000 square feet of space at Terry Francois Blvd. and 234,100 square feet at 30 Van Ness. These two projects are expected to finish development in 2023 and 2026.
Market Forecast for San Francisco Office Space Market in 2023
San Francisco’s 2022 downturn is expected to continue into 2023. The low sales and leasing activity of the past quarter indicate a slow start to 2023, and high interest rates and high construction costs could obstruct future development.
Going forward, employers will look for high-quality Class A office space, reflecting a general trend of flight to quality among metropolitan office space markets. Class C office space, on the other hand, will experience a significant drop in value.
Takeaways for Office Space Investors
San Francisco is experiencing a harsh downturn with little sign of bouncing back in the near future.
While the state of the market is not enough to warrant selling at a loss, investors should adopt a defensive position and be willing to provide significant concessions and tenant packages to attract ideal renters.
Landlords should also consider subleasing empty spaces to avoid dealing with the high vacancy rates.
As always, stay vigilant, do your research, and happy investing!