According to a new study released Tuesday, San Francisco’s office vacancy rate hit a new high of 31.8% in the second quarter of 2023, climbing up from 29.4% earlier this year as the economic situation in San Francisco continues to get worse.
Before the COVID-19 pandemic, San Francisco had a near 100% office occupation rate throughout the city, thanks in large part to the continuing tech boom and a steady demand for office space. However, with the pandemic, many companies began breaking leases to save money, while others embraced stay-at-home work and declined to continue using office space. Even after restrictions were dropped in 2021 and 2022, more companies switched to a work-from-home model or allowed more work-from-home positions, keeping many companies from returning to offices. In addition, high crime rates as well as a growing number of lease expirations by non-returning companies helped keep vacancy rates well above 20%.
In 2022 however, another major factor spiked vacancy rates yet again. Mass layoffs in the tech industry, which began in earnest in October 2022, quickly wiped out the need for large office complexes and long-term leases. Fueled by economic uncertainty, high inflation, rising insurance costs, more people working from home, the rise of AI and automation, the continued rise of e-commerce, and many companies overcompensating, many large companies shed thousands of employees overnight. Tens of thousands of cuts came from longtime Silicon Valley stalwarts Google, Amazon, Intel, Lyft, Yahoo, Meta and Salesforce, with the second quarter of 2023 even producing many corporate, non-tech layoffs for companies in the city as well.
As a result, the average office vacancy rate in San Francisco jumped from 19% in 2021 to 27% in 2022 to 29.4% in the first quarter of 2023. According to real estate brokerage CBRE on Tuesday, tenant demand continued to erode in the second quarter of 2023, with office vacancies shooting up another 2.4% to a high of 31.8%. Office occupancy experts told the Globe on Tuesday that while many factors are at play, one of the largest continues to be remote working, as many tech companies still favor it over office space.
“It’s true that crime in San Francisco, more companies cutting leases, and continued layoffs have all been big factors in the office vacancy rate going up, the biggest is still remote working,” said Michelle Duggan, a building occupancy researcher, Tuesday in a Globe interview. “Office rent or owning a building in the city is a huge expense, and until it is made attractive to get offices again, only bigger companies are really going to demand it. Apple and Google need to justify their huge campuses and buildings, so they have been bringing people back. But for other firms, especially start ups, getting rid of office space is a huge way to keep the bottom line. And it helps that studies have shown that workers are a lot more productive this way too. Not renewing that lease is big savings, so yeah, look at the vacancy rates go up.”
Making the rate worse has also been a growth of subleases from numerous tech companies in their existing office spaces or buildings, with Uber, Airbnb, and Salesforce all putting up new open subleases to let in the past three months. According to CBRE, this is only making the situation worse, and San Francisco could reach the one-third vacancy mark (33.3%) by the end of the year. And with the City of San Francisco also deeply worried, both due to the downtown economic impact and a projected annual loss of around $200 million a year in the next 5 years due to the high number of lost leases, the growing vacancy rate has become one of the bellwether statistics showing just how well the city is doing economically.
A growing office vacancy rate in San Francisco
“It’s dragged on longer than most people expected,” noted CBRE Tech Insights Center director Colin Yasukochi in a statement on Tuesday. “The lack of office workers coming downtown on a daily basis or even part time has a big impact on the city’s economy and tax base. It’s pretty significant.”
Yasukochi also noted that the rise of AI firms in the city could help swing the vacancy rate the other way due to the rapid growth of the industry, but that it has not yet reached a major point for it quite yet.
“There certainly are more AI firms out there looking for space,” added Yasukochi. “It hasn’t reached a critical mass that’s going to move the market.”
Experts also said that the city would likely to continue to try and continue to entice businesses to return down town.
“Since the end of the pandemic, the city has been pushing hard to bring these companies back downtown,” continued Duggan. “They saw that a high office vacancy rate could continue to be their future if they didn’t do anything, so they have been trying things for years. They’ve focused on bringing in new businesses against enticing businesses that left to return, lowered permit costs, paused certain taxes, and even pushed more money into law enforcement.”
“And we have recently seen some effects of this in a positive way. A bunch of AI companies started up here using office space in the city, and the SFPD had it’s largest recruitment class in years, which while help the safety situation and quell some concerns companies have on coming back to offices in the city. All good, but it is not nearly enough to reverse course. Reversing the vacancy rate will be like trying to turn around an oil tanker. You can do it, but it will take time and effort. It’s only the beginning.”
Vacancy rates are expected to continue to climb for offices in San Francisco for at least the rest of the year.
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