San Francisco’s Office Vacancy Jumps to New Record at 36%

The vacancy rate for offices across San Francisco has broken a new record at 35.9 percent.

The volume of empty offices climbed to 31.5 million square feet in the fourth quarter, a 2 percent rise from the previous three months, the San Francisco Standard reported, citing preliminary figures from CBRE.

The darkened offices are equivalent to nearly two dozen 1.4-million-square-foot Salesforce Towers — with the record vacancy rate expected to climb next year, real estate experts say.

Colin Yasukochi, executive director of CBRE’s Tech Insights Center, believes vacancy rates will likely continue to rise in the first half of 2024, then top out and stabilize in the second half.

That may be a positive note for a troubled office market, especially as the federal government has indicated it will cut interest rates next year.

Office vacancy rates in San Francisco hit all-time highs during the pandemic and continue to break records, with the city seeing the sharpest rise in vacancy rates of any major office market in the nation. Before the pandemic, its office vacancy rate was less than 5 percent.

The city’s offices began to empty out during a shift to remote work led by tech companies, followed by rising interest rates.

The vacancy challenges are tied to a broad decline in the market values of office properties in San Francisco, which has meant lower tax revenues and a growing municipal budget crunch while leaving some bargains for opportunistic private investors, according to the Standard.

In the past three months, some leases expired and several large subleases were put back on the market.

This year’s negative net absorption, or loss of occupancy of office space, was at -6.7 million square feet, the highest since 2020.

Leasing has picked up since October, with deals like OpenAI taking up 486,600 square feet at Uber’s Mission Bay headquarters. AI companies continued to drive leasing demand, accounting for around 28 percent of total leasing activity in the past year.

However, experts say the notion that AI would save the city’s struggling office market is a long shot, especially as AI companies aim to limit their number of workers through technology, according to the Standard.

— Dana Bartholomew