Report: State of the San Francisco Office Market Remains Perilous

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By Vladimir Bosanac

The state of the San Francisco office market is a far cry from the way it looked just a few years ago, and one wonders how long it will take for this Northern California city to regain its footing. According to a recent Newmark San Francisco Market Snapshot from February of 2023, vaccines continue to climb, net absorption is still hovering in negative territory and the average asking rents are starting to feel the pain and are beginning to slide. On top of it all, layoffs are starting to hit the region’s tech employers, bringing further uncertainty to the city’s commercial real estate industry.

The City by the Bay has been one of the worst impacted by the aftereffects of the COVID-19 pandemic. After sending their employees home, companies operated with increased efficiency and profitability, making a return to work an acute challenge for most employers operating in San Francisco and across the Bay Area. As a result, the 88.5 million square feet of office space across the City is now 22.1 percent vacant, according to Newmark, which is up from 19.1 percent from the previous quarter and up from 16 percent a year ago. Available sublease space, per Newmark, increased by 25 percent from 6.7 million square feet to 8.45 square feet, although it is unclear if this number is included in the vacancy rate. Vacancy and availability are measured differently by various brokerage firms across the region, but a company looking for office space in San Francisco will have many choices, according to the report.

This vacancy is impacted by continued negative absorption in the market, which came in at 1.9 million square feet just in the fourth quarter of 2022. In the third quarter, that absorption was negative 603,000 square feet. Despite their desire to bring employees back to their home base, companies are also wondering how much space they will need in the future. Over the past twelve months, 23,000 jobs were lost in San Francisco, and another 1,307 just in January, according to Newmark’s report. This will likely mean that companies will continue to evaluate how much footprint they need to occupy and where. The effect of all this is creating sustained pressure on average asking rents, which were at $74.15 per square foot in the fourth quarter of 2022, down from $74.73 from the quarter before and further downhill from $77.82 a year ago.

Newmark sees direct vacancy increasing as tenants look for ways to reduce their lease obligations as they expire. The firm also predicts that asking rates will continue to slide further as subleases and general office availability increase over the foreseeable future.

As mentioned above, subleases have continued to increase in number and total square feet. The city has 191 subleases available on the market, up from 163 a year ago and up from 78 in March 2020, based on Newmark’s report. Unsurprisingly, these subleases are hovering in the market longer, averaging around 68 weeks as of February 1, 2023, up from 66 weeks a year ago and 16 weeks in March 2020.

On the positive side, Newmark is tracking a few companies looking for space in the City. The Lending Club is looking to take down 90,000 square feet. The global law firm Goodwin Procter would like to find 75,000 square feet. Dutch payments company Adyen seeks 70,000 square feet, while KPMG wants to lease 55,000 square feet.

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