Even under a worst-case scenario that assumes 2015 and 2016 employment losses consistent with those in the Great Recession, the San Francisco office vacancy rate would reach just more than 17 percent by the end of 2016, assuming current construction levels.
That’s according to new research from Jones Lang LaSalle that analyzes the San Francisco office landscape over the next four years in light of a substantial development pipeline and the city’s slight occupancy gains in the first six months of the year.
“If we just have a regular cyclical market we end up with higher vacancy, but not that much higher than we are today,” said Julia Georgules, JLL research manager in Northern California. “In a worst-case scenario, where there is a recession, the result isn’t as dramatic as the last recession and not as severe as in the dot.com bust.”
San Francisco office leasing, while still producing occupancy gains, has slowed dramatically in the last year. At the same time, the development and redevelopment pipeline has expanded. Currently, 10 buildings are slated for delivery from now until 2016, including the 1.4 million square-foot Transbay Transit Tower, JLL said.
Together, the new and redone properties add 4.5 million square feet to the San Francisco office inventory. Tenants have spoken for only 30 percent of that square footage. Numbers from the city of San Francisco suggest many additional office developments are being proposed, though annual new-development limits of 875,000 square feet should keep that in check.
Technology’s dominance of the San Francisco leasing market has been absolute and continues to be so. In the first half of 2013, tech tenants occupied an additional 416,000 square feet even as lawyers, financial services companies and business services abandoned nearly 200,000 square feet, according to research from CBRE Inc. In 2012, technology tenants accounted for more than 1.5 million square feet of occupancy gains. Lawyers, the next largest category, added less than 300,000 square feet, according to JLL.
With not quite 50,000 people employed by technology companies of every ilk today in San Francisco, the city’s employment base has shifted substantially since the dot-com era, Georgules said. Tech workers now account for 9 percent of the city’s private-sector employment and a whopping 25 percent of its office employment.
That compares to 2000, when the city had just more than 35,100 technology jobs representing 12.5 percent of the city’s office employment and 6.4 percent of total private-sector jobs.
“While employment figures on an absolute basis have made a complete recovery in San Francisco, the composition has shifted significantly and perhaps permanently—a sign of the evolving workforce and the millennials driving these trends,” the report says.
The implications for office providers are profound. Though lawyers and other business professionals are adopting some of the open office and more collaborative features characteristic of the tech sector, the two office types remain distinct. At the same time, technology tenants have clear preferences about their surroundings, and for San Francisco to remain a competitive landscape for those occupants, the new development is needed, she said.
Under the study’s worst-case scenario, JLL assumed employment growth of approximately 9,200 new jobs in 2013 and 2014 combined, based on projections from Moody’s Analytics. Those gains are followed by two years of severe employment loss totaling 9 percent of office employment—the same loss experienced during the Great Recession. Even with the new supply, at 17.1 percent, the vacancy rate would remain below that of the last two peaks, 21.2 percent and 17.8 percent, respectively.