San Francisco Office Vacancy Rates Reach Record High

According to a new report by real estate firm CBRE, San Francisco’s office-vacancy rate rose to a new record high of 36.6% in the first quarter of 2024, albeit with some positive news that tech and AI companies could reverse this trend by the middle of the year.

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 COVID-19 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, the rising crime rate in San Francisco, 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 to 31.8% in June. There was some good news during this time, with AI companies rushing into the city through a new tech field boom. In some cases, companies swooped in and leased 500,000 square feet of office space at once. However, that failed to break many trends. By September, the vacancy rate was at 33.9%, with crime forcing some tenants to switch to remote work and large scale renter companies such as WeWork also failing. By the end of November, that figure had risen to 35%, with December reaching 35.9%.

SF reaches 36.6% vacancy rate

This led to the 36.6% office vacancy rate announcement on Friday. While still growing, CBRE noted that the overall vacancy rate is now going down. Tech companies are slowly trickling back, with the explosion of AI companies and startups beginning to fill spaces that have been vacant now for years. Many companies are also being attracted by falling average rental prices. At the rental peak in early 2020 right before the COVID-19 pandemic, the price per square foot in San Francisco was $88.40 per square foot. In March 2024, the average has now fallen to $68.35 per square foot, with prices expected to further decline this year as many office buildings hope to bring in new tenants in largely empty buildings. In total, AI companies accounted for 28% of all new leases in the city last year, with that number expected to grow this year.

“The San Francisco office market is beginning to transition out of its four-year downturn,” CBRE Tech Insights Center executive director Colin Yasukochi said. “While it will take many years to rebalance supply and demand, we are starting to see positive signs.”

Building occupancy researcher Michelle Duggan added, “It needs to be clear here that San Francisco itself is not starting this comeback. AI companies are part of the tech world, and the Bay Area and Silicon Valley is still the hub of that. Also, office buildings are really lowering rents right now, and all these companies are taking advantage of that. Nothing the city is doing is really causing this to happen. They just lucked out on circumstance and landlords being desperate for tenants.

“We might see the vacancy rate top out later this year. 36.6% is nothing to be proud of. That is well over a third of theirs buildings being empty. But AI is helping close that gap. What the city needs to do is diversify. They’re trying to bring some college campuses downtown, but that is just one small area. They need to get in another industry. Most cities right now are bringing in tech as a secondary business. San Francisco needs to do that. See who they lost. Maybe get Bank of America to move back from New York. That would be a coup, but also highly unlikely. They need something that big to spark a real turnaround. San Francisco learned, harshly, that they cannot rely on just tech. You want to know why? 36.6%. That’s why.”