San Francisco Office Market Faces Record Vacancy Rates Despite AI Boom
San Francisco’s once-booming office market is grappling with record-high vacancy rates, reaching a staggering 34.5% in the second quarter of 2024, according to a report from commercial real estate firm Cushman & Wakefield. This marks a significant increase from the first quarter’s 33.9% and a stark contrast to the 5% vacancy rate pre-pandemic. The average asking rent has also plummeted to $68.27 per square foot, the lowest since late 2015. This downward trend is attributed to the combined impact of the ongoing shift to hybrid work after the COVID-19 pandemic and the tech industry slowdown resulting in massive layoffs.
Key Takeaways:
- Record-high Vacancy Rates: San Francisco office space vacancy rates reached a new peak of 34.5% in the second quarter of 2024, up from 33.9% in the first quarter and a pre-pandemic rate of 5%.
- Tech Layoffs: The tech industry’s mass job cuts since early 2022, affecting giants like Alphabet, Meta, Amazon, Tesla, Microsoft, and Salesforce, have significantly impacted office demand.
- AI Boom: While the AI sector is thriving, with companies like OpenAI, Anthropic, and Scale AI securing substantial office space in the city, it’s not enough to offset the broader market decline.
- Shift to Hybrid Work: Tech companies, law firms, and consulting firms are downsizing office footprints and transitioning to hybrid work models, leading to a decrease in overall demand.
- Rent Declines: Average asking rents have dropped to their lowest point since 2015, reflecting the market’s struggle.
While generative AI is driving growth and major players like OpenAI are leasing vast spaces in the city, the overall trend points towards a shrinking office footprint, with companies prioritizing quality over quantity. The desire for prime locations with amenities near restaurants and shops, coupled with decreased rental costs, is encouraging companies to relocate and consolidate their presence in more desirable areas.
Robert Sammons, senior research director at Cushman & Wakefield, highlights the continued appeal of "trophy space" – high-quality office buildings with desirable features. He explains, "The best quality trophy space continues to perform well, because tenants want to be in the best locations with the best amenities around them."
Despite the presence of major employers like Salesforce, Uber, Visa, and Wells Fargo bringing back employees for hybrid work arrangements, the financial district and SoMa continue to face significant challenges. SoMa, in particular, struggles with a vacancy rate nearing 50%, partly due to its distance from mass transit options and the impact of retail departures.
Cushman & Wakefield notes some positive signs, with potential for increased absorption and stabilization of office job numbers in the second half of 2024. However, Sammons warns that further declines in rents and vacancy rates are possible, with the upcoming presidential election potentially contributing to delays in new lease agreements.
Looking ahead, the San Francisco office market faces a complex and uncertain future. The rise of AI and hybrid work present both opportunities and challenges. While the city remains a hub for innovation, navigating the evolving needs of businesses and the changing demands of the workforce will be critical for its continued success.
