San Francisco Office Vacancy Rates Reach Record High of 35.9%

According to a new report by real estate CBRE, the office vacancy rate of San Francisco hit a new high of 35.9% for the fourth quarter of 2023, shooting up nearly a full percentage point from the previous high of 35% from earlier this month.

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%.

Reaching a new vacancy record

However, the overall decline continued through December, reaching 35.9% this month. While more AI firms have set up shop in San Francisco, along with many companies electing to keep offices through the holidays, many companies continued to leave or shored up office space to save on high real estate costs in the city. In total, as of mid-December, 31.5 million square feet of office space remains vacant throughout San Francisco.

While much of the new vacant space is attributed to many companies and firms either not renewing leases or leaving, a large proportion is also because of large sub-leases going unfilled. Experts noted on Monday that while vacancy rate has been slowing down, it is expected to go down well into 2024 and possibly reaching 40% before going back up.

“Occupancy losses will continue through the first half of 2024, driving up overall vacancy even further, before stabilizing in the second half of next year as economic conditions improve and interest rates decline,” said CBRE executive Director Colin Yasukochi.

Building occupancy researcher Michelle Duggan added that “AI is really helping out, but San Francisco itself is not really giving any incentive for companies to move in. It is still a tech heavy city, and wanting to be around those companies is keeping that up. And a bunch of smaller tenants, like, say, law firms or small start-ups, they can take little pieces here and there. But they need big companies coming in. That’s hard to do with a reputation that a city like San Francisco currently has, not to mention taxes and ease of travel and so many other factors.

“But 35.9%. LA is at 15.5%, only up from 14.2% earlier this year, with a turnaround expected soon. San Jose is at 31.5%, but only up from 31.3%. And look outside California. Chicago is at 23.7%. New York around 17%. Austin 22%. Miami is at LA levels. It is everywhere to some extent because of so many working from home or utilizing less space. But San Francisco and San Jose and any tech heavy city, even to areas where companies from California are moving too, have these higher vacancy rates. More diversified cities that didn’t put all their eggs in one basket, they have much less a problem with vacancies and have found ways to keep tenants in.

“And look, San Francisco is still chasing tech with AI. They need to diversify, maybe try to attract banking back. Something. But, at this point, that is going to be hard to do.”

The first vacancy figures for 2024 are expected to come out early next year.