Is San Francisco’s Office Market Making a Comeback? Still Too Early to Say

San Francisco, Newmark, Bay Area, Sephora, Goodby Silverstein & Partners, ViacomCBS
Photo by Rezaul Karim on Unsplash

By Vladimir Bosanac

There may be some signs of normalcy returning to the Bay Area, even as cases of COVID seem to be increasing again. The good news is that there are vaccines that will protect us from the worst effects of this disease, but the bad news for the commercial real estate market is that things seem to be moving very slowly. According to a recent first quarter of 2022 market report by brokerage firm Newmark, San Francisco office vacancy increased from the fourth quarter of 2021—up 120 basis points to 17.2 percent. At the same time, the market saw almost half a million square feet of negative absorption in the first quarter of 2022 along with inventory increasing by approximately 640,000 square feet with the addition of 415 Natoma. 

The vacancy rate in the city seems to be a real estate version of long COVID that the market cannot seem to shake. According to Newmark, a year ago this figure was at 15.3 percent. It should be noted that this is not the same as the availability rate, which tracks closer to 30 percent, according to a number of alternative industry reports. In the fourth quarter of 2021, according to Newmark, vacancy went up to 16 percent, and then 17.2 percent in this most recent quarter. 

This malady seems persistent even with some favorable news in 2021. In the fourth quarter, net absorption entered the positive territory at roughly 324,300 square feet. Most of this movement came from Sephora, which took down 286,000 square feet across 16 floors at 350 Mission. This was the biggest lease that Newmark recorded for the quarter, along with Goodby, Silverstein & Partners renewing 81,065 square feet at 720 California and ViacomCBS taking out a 70,770 sublease at 680 Folsom. In the first quarter of 2022, however, net absorption dipped into the negative territory again with 483,000 square feet, which is still better than the 2.2 million square feet of negative absorption from a year ago.

If one is trying to find some good news in all of this it is probably the fact that asking rates have plateaued. Whether that’s good news or bad is perhaps a matter of perspective, but in the first quarter of 2022, they were up slightly. The average asking rent hit $78.39, following $77.82 in the fourth quarter of 2021 and $77.94 in the first quarter of 2021. Newmark forecasts these to go up in the next 12 months, however, many variables will impact the final outcome of that prediction.

Perhaps the best news of the start of 2022 in San Francisco is the fact that unemployment hit 3.4 percent, which tracks lower than the state average of 5.4 percent, according to Newmark. This level is the same as the unemployment rate San Francisco saw in January of 2020, just months before the COVID pandemic took full effect across the globe.

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