Office Vacancy Reaches a Record 36.6% in San Francisco

San Francisco’s 88 million-square-foot office market, with some of the highest vacancies in the nation, has grown even hollower.

Office vacancy hit a record 36.6 percent in the first quarter, up 1.3 percent from the revised 35.6 percent vacancy in the previous quarter, the San Francisco Business Times reported, citing figures from brokerage CBRE. The preliminary vacancy in the final quarter was 35.9 percent.

Office availability, which includes available space whether it’s vacant or not, rose to 38.7 percent from 38.5 percent.

The city’s office market has grown emptier year by year since the first quarter of 2020, when vacancy was at a historic low of 4 percent. Then came the broad shift to remote work led by tech companies.

The good news: more companies are on the hunt for offices in San Francisco.

Even as vacancy increased in the first quarter, so did the number of square feet prospective office tenants are seeking in San Francisco, Colin Yasukochi, executive director of CBRE’s Tech Insights Center in San Francisco, said.

“Demand really dictates where the market is headed. Any time we have a downturn, it’s usually because demand has gone negative,” Yasukochi told the Business Journal. “The level of tenants in the market has gone up, and that is, at least right now, showing a positive growth.”

Tenant requirements, or how much office space tenants are looking for, rose to 6.3 million square feet in the first quarter, up from 4.2 million square feet in the previous quarter and 3.4 million square feet in the first quarter of 2023.

In the first quarter of 2020, which CBRE refers to as the peak of San Francisco’s market, tenant requirements were at 6.8 million square feet.

Tenant demand isn’t enough to staunch the supply of available offices in the city, leading to this quarter’s increase in vacancy. But if demand remains steady, vacancy could stabilize or even decrease in coming quarters.

Leasing activity hit 1.3 million square feet during the quarter, down from 2 million square feet in the fourth quarter.

But based on current tenant requirements, CBRE predicts 6.5 million square feet of leasing activity this year, Yasukochi said. That’s about half the leasing activity in early 2020.

The amount of subleased offices dropped to 9.1 million square feet this quarter from 9.9 million square feet during the same period a year ago. That will put pressure on landlords faced with leasing more space directly, Yasukochi said. Annual average asking rents, at $68.35 in the first quarter, are expected to fall further this year.

— Dana Bartholomew