San Francisco’s office vacancy rate continues to climb, reaching new heights in the second quarter of this year. According to CBRE, the city’s 89.2 million-square-foot office market recorded a 37% vacancy rate, up 0.3% from the first quarter. This increase, although slight, indicates a trend towards stabilization in the city’s office market.
The office availability rate, which includes all space available for lease, also rose by 0.3% in the second quarter, reaching 39.4%. These figures mark another set of historic highs for San Francisco’s office market, which has been struggling with rising vacancy and availability rates since the onset of the Covid-19 pandemic in the spring of 2020. Prior to the pandemic, city vacancies had hit an all-time low of less than 5%.
Colin Yasukochi, who leads CBRE’s Tech Insights Center, commented on these “incremental changes,” suggesting that the city’s office market may be nearing stabilization. This potential stabilization could mean that metrics like vacancy and availability rates might soon stop rising, and rental rates could remain steady.
Yasukochi also highlighted the increase in tenant requirements, which climbed to 6.9 million square feet in the second quarter, up from 6.4 million in the first quarter and 4.5 million this time last year. However, he noted that this demand is only expected to generate 10% net new demand, as many tenants are downsizing or renewing leases for the same footprint. This is a stark contrast to 2019, when 60% net new demand was generated by tenants looking for space.
“San Francisco usually has a very quick rebound economically in its real estate market, so we do expect to see that, probably within a couple years’ time,” Yasukochi said. “But if we’re at 37% vacancy now, two years from now, that vacancy is still going to be a very high number. That doesn’t mean leasing activity and demand won’t make it feel a lot healthier than it does today.”
Net absorption, which measures the change in space occupied by office tenants in the city, was negative 442,000 square feet in the second quarter. This suggests that tenants continue to give up more space than they lease in San Francisco. This figure does not include the approximately 320,000 square feet that Google is expected to vacate at One Market Plaza when its lease ends next April.
Despite these challenges, the AI sector remains a bright spot for the city. It accounts for a quarter of all leasing activity this year so far.
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