The bottom may be murky for the office market in San Francisco — the worst in the nation — but a boost in sales and leasing may cast a glimmer of hope.
Downtown office towers traded last year for an average $310 per square foot, from $253 in 2023 and $1,106 in 2022, when only three buildings were sold, according to the San Francisco Chronicle, citing a report from CBRE.
At the top of the market in 2018, 25 Downtown office buildings sold for an average $861 per square foot.
Then vacancy soared to more than a third of offices during a shift to remote work, pushing down office building prices and rents. In 2023, local buyers set a new floor for the market at prices 75 percent off their previous values, according to The Real Deal.
Last year, interest in San Francisco offices grew, hinting at a workplace rebound. The number and dollar volume of office building sales more than doubled in greater Downtown, surpassing 2022 and 2023 combined, according to CBRE.
Some 23 office buildings were sold last year for a combined $916 million, including partial interest and loan note sales. In 2022 and 2023, 12 office buildings were sold for a combined $863 million.
The growing number of sales suggests a larger buyer pool — and a signal that “there is more confidence in the market moving forward,” Colin Yasukochi, director of CBRE’s Tech Insights Center, told the Chronicle.
Property values have stabilized for certain types of buildings in choice locations, according to CBRE. Downtown’s newer Class A buildings sold for an average $329 per square foot last year, up from $250 per foot in 2023.
Also, there have been more buildings hitting the market with existing tenants, which drives up values, Yasukochi said.
Overall, Downtown prices are still far below where they were five years ago, as the market continues to face an uphill climb. Despite inflation easing, the Milken Institute recently ranked San Francisco and the Bay Area near the bottom of U.S. metros in economic performance.
Some office buildings are still trading for fire-sale prices. This month, a vacant 92,000-square-foot office building at 731 Market Street in the Financial District sold for $160 per square foot, a quarter of its 2015 value.
Kyle Kovac, of CBRE’s Capital Markets team, said he’s seeing “more of an inclination” from owners and lenders to offload properties as loans mature, as opposed to modifying them.
“Investors are drawn to the dramatic reset in basis relative to previous peak pricing, a new look (more moderate) City Hall, and the promise of artificial intelligence becoming the next big demand wave,” Kovac told the Chronicle.
While pricing varies based on the particular building, he believes that “we have found the bottom of the market and have already seen signs of appreciation.”
This year, CBRE predicts growing lease demand could lead to a significant rebound in pricing for office buildings by calling back institutional investors, who pulled out of San Francisco years ago.
“While 18 months ago it was primarily private capital chasing deals, we are now seeing traditional institutions join the party,” Kovac said. “There is more active capital chasing San Francisco office properties today than pre-COVID.”
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