The collapse of San Fran continues. Between firms leaving the town—and companies allowing workers to work from home instead of going into a war zone, the office vacancy rate continues to grow. As it grows, that makes fewer customers for small businesses in town, especially in the Market St. area.
“The vacancy rate rose because companies ending leases or putting space on the market for sublease in the second quarter slightly outpaced new demand, though Colin Yasukochi, executive director of CBRE’s Tech Insights Center, issued a statement saying the difference was at the lowest level since the second quarter of 2022. Average asking rents declined by 30 cents per square foot to $68.25 quarter-over-quarter.
Leasing activity surged to about 1.9 million square feet, bringing the total for the first half of the year to 3.3 million square feet — 25% ahead of last year’s pace.”
The City’s office-vacancy rate just inched to a new record high
By Patrick Hoge, SF Examiner, 6/24/24 https://www.sfexaminer.com/news/business/san-francisco-office-vacancy-rate-inches-to-new-record-high/article_ae6ee95a-3280-11ef-8126-13745ca51379.html
San Francisco’s office-vacancy rate inched up to another record high of 37% in the second quarter of 2024 while showing signs of “stabilization,” including rising demand for office space, according to preliminary data released by commercial real-estate company CBRE.
The new vacancy milestone — up from 36.7% the prior quarter — had been expected by real-estate experts as the local office market continues to adjust to a reality in which large numbers of employees who once came regularly to offices have been routinely working remotely.
The vacancy rate rose because companies ending leases or putting space on the market for sublease in the second quarter slightly outpaced new demand, though Colin Yasukochi, executive director of CBRE’s Tech Insights Center, issued a statement saying the difference was at the lowest level since the second quarter of 2022. Average asking rents declined by 30 cents per square foot to $68.25 quarter-over-quarter.
Leasing activity surged to about 1.9 million square feet, bringing the total for the first half of the year to 3.3 million square feet — 25% ahead of last year’s pace.
Artificial-intelligence companies have continued to be a major demand driver, accounting for 25% of total leasing activity in the first half of the year, slightly below the 28% of total leasing for the entire year of 2023.
Tenant demand, meanwhile, rose to 6.9 million square feet of office space, up from 6.4 million in the first quarter, 4.5 million square feet a year ago, and a low of 2.8 million square feet in the fourth quarter of 2022, Yasukochi said.
The second quarter looks to be on par with the 2019 pre-COVID-19 average of 7 million square feet, though net new demand — which could be companies expanding or new entrants to the market — is expected to be about 10% of tenants in the market versus 60% in 2019, CBRE’s numbers showed.
Yasukochi said the evolving market dynamics had given investors confidence to buy distressed office properties, even though a substantial recovery might still be many years into the future.
The average price for the six properties sold thus far in 2024 was $315 per square foot, versus $283 per square foot in 2023 and a peak value of $1,106 per square foot in 2022.
The biggest lease deal for the quarter was for the artificial-intelligence company Scale AI, which took 178,234 square feet in a sublease deal at 650 Townsend St., Yasukochi said. Other big deals included The City of San Francisco for 157,154 square feet at 1455 Market St., and workforce-management platform provider Rippling for 123,320 at 400 California St.
Alexander Quinn, senior director of Northern California research for real-estate firm JLL, predicted The City will likely not hit “peak vacancy” until the first quarter of 2025.
“That’s a forecast, but that’s kind of where we think we’re gonna land, and then we start burning off from there,” Quinn said.
The decline in office usage is historic and reflects not a change in office employment but a change in behavior, with many employees simply not commuting to offices to work regularly, he said.
Before the pandemic, space was so tight that companies would lease space to accommodate anticipated future growth. That is not happening currently, Quinn said.
“There is no issue regarding scarcity,” Quinn said.
Despite the still-rising vacancy rate, Quinn said he sees reasons for optimism.
“We’re much more positive about some of the indicators and what it’s telling us about demand for office space in San Francisco,” Quinn said.
While leasing activity is not back to pre-pandemic levels, it is becoming more “healthy,” with demand particularly intense in the Mission Bay area where the artificial-intelligence company OpenAI last year subleased two buildings from Uber and the credit-card giant Visa has its headquarters, Quinn said.
Venture-capital investment trends also bode well for the future, with San Francisco receiving an increasing share of investment in early-stage companies such as AI firms, Quinn said.
