San Francisco Fed President Urges Companies to Get Employees Back In Offices

According to a new report by real estate firm CBRE, San Francisco’s office-vacancy rate rose to a new record high of 37% in the second quarter of 2024. This sparked San Francisco Fed President Mary Daly to say that companies in the city should do more to bring back workers to offices.

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%.

Vacancy rate reaches 37%

In 2024, the AI boom kept slowing down the vacancy growth rate. However, thanks to more companies cancelling leases, it still crept up. In Q1, the rate rose to 36.6%. And the recently released Quarter 2 results found that while vacancy growth was being curtailed even more, it still wasn’t enough to stop it from climbing, reaching 37%. Average rents also went down by 30 cents per square foot during this time as well, showing that the market was still struggling.

“We’re finally starting to see signs that the office market is stabilizing where the amount of vacant space coming onto market has slowed down pretty significantly,” said CBRE executive director of Tech Insights Center Colin Yasukochi. “So the amount of space that tenants have signed leases for has increased by about 25% through the first half of this year compared to last year. So, we’re expecting again to see more companies acquire office space for their employees this year than they did last year.”

Despite that optimism, as well as projections showing that the rate should plateau out later this year, many in San Francisco have urged companies to bring back employees into offices and avoid canceling more leases. On Monday, this included San Francisco Fed President Mary Daly.

“Every week I come, traffic is getting worse. That’s a good thing, frankly, sometimes. There’s more work to do to make the city, as well as the surrounding area, better and help it reach its full potential. If you’re the founder of something and you’re part of this, then let’s change it. This isn’t being done to us, we live in the city and so together we can help and assist. CEOs and founders can help. Talk about what you need to fix and also encourage your people to come back to work.”

However, others are not as optimistic.

Building occupancy researcher Michelle Duggan added that “Even if San Francisco does begin a turnaround this year, look at where they are at. 37% office vacancy. Less than five years ago it was virtually at 0%. So San Francisco has a long road ahead. They need to get companies back there, especially tech companies. And that will be hard since so many went remote. And don’t forget that the current boom, AI, might be bubbling right now. San Francisco needs to diversify and fast.

“In any case, it will be a long road to recovery.”

Q3 vacancy data is set to come this fall.