San Francisco Office Vacancies Reach 35%, Breaking New Record

According to a new study released on Friday, San Francisco’s office vacancy rate hit a new high of 35% in December, 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 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.

According to real estate brokerage CBRE on Tuesday, tenant demand continued to erode in November, with office vacancies shooting up another 1.1% to a high of 35%. This includes normally full areas within the city including Union Square, which is currently at 18% vacancy. While there are multiple reasons for the continuing vacancy growth, experts said that remote work and the continued reliance of tech firms to use office space in the city have been the two biggest factors in negating any gains in filling vacant space.

Jeff Belisario, Executive Director of the Bay Area Council Economic Institute, said in a statement on Thursday that “The challenge still remains – remote work and the city’s reliance on tech as it’s largest industry and those tech workers, they’ve been working from home for a very long time and many of those businesses are operating successfully from home. Homelessness, crime, public safety, and all around cleanliness are still the top concerns among current and potential San Francisco employers.

“It’s not a doom loop, right? The numbers don’t necessarily suggest that. A doom loop would have high unemployment, it would have businesses running to other cities. That’s not where we are but we’re not in a spot where we are thriving and succeeding, we’re kind of surviving.”

Vacancy rates slowing down yet still growing

CBRE Executive Director Colin Yasukochi added that “Right now in downtown San Francisco, we have a vacancy rate of a little over 35% which is the highest that we’ve ever recorded in the history of San Francisco. Office vacancy numbers in San Francisco were 3 to 4% pre-pandemic, meaning we’ve seen more than a 30% increase and that trend may continue. We think that the vacancy rate will probably creep up some more in 2024, probably at least through the first half of the year. I would say because there still are firms who are consolidating and reducing the amount of office space they have.”

While vacancies are expected to now continue to hit new highs in 2024, experts have noted that the rates will likely bottom out sometime next year because of more and more companies ending remote work and the further growth of AI.

“Office vacancy growth has decelerated considerably in the latter half of 2023,” said Michelle Duggan, a building occupancy researcher, Friday in a Globe interview. “I mean, the vacancy growth reported in this latest report was only 1.1%. That is way less than previous reported periods.

“The fact is that San Francisco is just running out of companies who can move, who have leases expiring, or who want to move. The companies who are staying now generally want to stay and are ending more and more remote work policies. And like you said, the tech industry is funding new areas to advance to and causing a huge new scramble for offices. San Jose has been drawing away many of these tech companies, but San Francisco has still the majority of them opening up shop there.

“I’m not sure that San Francisco will reach 40% vacancy next year. They’re getting so close to hitting bedrock. But don’t put the praise on lawmakers. They can pass all the laws trying to entice companies that they want. This is, by far, an economic driven evening out, with companies either coming back, expanding, or opening up in San Francisco because it is best for them.”

Currently, it is expected that the city will see a vacancy turnaround sometime in mid 2024.