Brokers Predict Five-Year Horizon for SF Office Recovery

Bay Area commercial brokers see distress and vacancy in their crystal balls, according to a new poll from Avison Young.

Most agents believe that 50 to 75 percent of Bay Area assets will default or see distress in the next 12 months and that it will take five years or more for the San Francisco office market to return to a 12 percent vacancy level.

The long time span for the predicted recovery came as a bit of a surprise to Ross Robinson, who leads Avison Young’s San Francisco office, though he knows “overall sentiment is down” among respondents. Personally, he said he has a more optimistic view based on San Francisco’s legendary ability to recover from previous downturns.

“We all know San Francisco has been a boom-and-bust town. So I would have expected a quicker rebound than five years,” he said.

This is the first time the commercial brokerage has conducted the survey, which received responses from 40 Bay Area Avison Young agents. It was created to gather information from their “collective expertise” that could then be passed on to clients, according to Dina Gouveia, the firm’s market intelligence manager for the West Region.

The vast majority of respondents felt that 2024 would be the year that at least 25 percent of Bay Area companies would enforce a return to work policy, but they were split on whether it could go as high as 75 percent or top out at 50 percent of companies. No one predicted a five-day in-office work week would become the norm and the most thought three days in the office would end up as the typical hybrid schedule.

Striking a more positive note, the majority of agents also thought that the layoffs that have hit the Bay Area hard over the last two years would begin to abate this year, with less than 25 percent of companies engaging in additional layoffs.

As for the brokerage business, the agents predicted that tenant walkthroughs and leasing velocity would elevate slightly in the year ahead. The majority of respondents felt tenant interest would improve on the retail side as well.

The top attractions for prospective office tenants will be access to transit and walkable amenities, according to the survey. Outdoor areas are desirable, but don’t need to be roof decks in particular. In-building amenities like a lounge and coffee bar, fitness center and restaurants are nice-to-haves, but not as important as a transit-friendly location and outdoor space. Concierge services and co-working spaces are also not expected to be big draws.

The agents also predicted that concession packages would continue to rise in the new year as landlords try to chip away at the city’s highest-ever vacancy rate, with one in three offices now empty.

“Smaller and mid-sized tenants that moved out of San Francisco due to high rents, early-stage growth companies or companies looking to upgrade their space now have the opportunity to secure the lowest rents within the past 10 years,” said Robinson. “Many landlords are providing outsized concessions to achieve longer term leases.”

Avison Young agents expect Silicon Valley’s office market to recover first, San Francisco second, the Peninsula third and Sacramento fourth. AI leads the pack for the industries that will emerge from the downturn as the predominant industry in the region, followed by industrial, biotech, clean tech and sustainable energy.