The office-vacancy rate in and around downtown San Francisco continued to creep upward to a new record high in the fourth quarter of 2023, according to a report from CBRE.
The increase, though expected, came despite the highest level of leasing activity since the second quarter of 2022 and pushed The City’s core business areas into new territory as the vacancy rate hit 35.6%, up 1.6 percentage points from the prior quarter, the commercial real-estate firm reported.
Meanwhile, the number of office-using workers was down slightly from the previous quarter to 345,200 from 346,500.
“Looking ahead, the vacancy rate will continue to inch upward but will likely peak in late 2024,” CBRE’s researchers predicted.
San Francisco has been particularly hard-hit, but it is not alone, with cities across the country also harboring expanses of empty office space as employers have shed space and workers have not returned to offices in the same numbers as before the COVID-19 pandemic because of the rise of remote work.
Moody’s Analytics issued a statement Monday saying much of commercial real estate was “stuck in limbo” despite positive signs in the broader economy, and the national office vacancy rate had risen to a record-breaking 19.6%, higher than the 19.3% peaks hit in 1986 and 1991.
San Francisco’s glut of office space is leading building owners to lower rents, with the average asking rate for directly leased space dropping 3.4% in the quarter and 8.7% for the year. That brought the decrease in average asking rate to 21.6% from its peak in early 2020.
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Asking rates will keep dropping as more buildings are likely to sell at discounted prices in coming months, the report said.
Landlords also became more aggressive in trying to attract emerging tech and AI companies, “many of which seem to prefer cheaper space as opposed to paying higher rents for trophy or view space,” the report states.
By the end of the quarter, there were 1.25 million more square feet of office space on the market in San Francisco than at the beginning, the surge driven by a small number of tech companies giving up large blocks of sublease space back to the market. Lease cancellations by First Republic Bank, the San Francisco-based bank that collapsed in May, and WeWork, the once high-flying co-working company that went bankrupt in November, were also contributing factors.
On the bright side, total leasing activity was 1.85 million square feet for the quarter. That was 38% higher than the previous quarter and the highest level since the second quarter of 2022. Technology companies accounted for 67% of all square footage leased in the quarter and 79% of the top 25 deals.
The biggest lease CBRE identified was for the artificial-intelligence company OpenAI, which took 486,600 square feet in Mission Bay and another 52,815 square feet in the Mission district.
Tenants overall sought a total of 4.2 million square feet of space, a 19% decrease from the prior quarter but still 50% higher than the fourth quarter of 2022.
Eight office buildings sold in the quarter for a total of 902,000 square feet, almost all trading at deep discounts compared to pre-pandemic sale prices, according to the report.
