San Francisco’s commercial real estate market continues to face significant challenges as the vacancy rate for office space reaches a new record high. According to a report by Cushman & Wakefield, the vacancy rate in the second quarter rose to 34.5%, up from 33.9% in the previous quarter and a significant increase from 5% before the pandemic. This decline is attributed to the struggle of bringing employees back to the office after the Covid-19 pandemic and a slowdown in the tech market, leading to mass job cuts across the industry.
The average asking rent for office space in San Francisco also dropped to its lowest level since late 2015, standing at $68.27 per square foot in the second quarter. This represents a decline from $72.90 a year earlier and a peak of $84.70 in 2020. The city’s real estate market has been hit hard by the twin challenges of attracting employees back to the office and the tech industry’s downturn.
Despite these challenges, the growing popularity of generative AI has provided some relief to the struggling market. Fast-growing startups, including OpenAI, Anthropic, and Scale AI, have leased significant office spaces in San Francisco. OpenAI, with a private valuation exceeding $80 billion, leased approximately 500,000 square feet in the Mission Bay neighborhood, marking the largest office lease in the city since 2018. Anthropic subleased 230,000 square feet at Slack’s headquarters, while Scale AI secured a lease for around 170,000 to 180,000 square feet in Airbnb’s office building.
However, while AI startups are making substantial lease agreements, the broader trend indicates that tech companies, law offices, and consulting firms are looking to reduce their office footprint as they embrace hybrid work models. Many companies are seeking higher quality spaces in desirable parts of the city, taking advantage of reduced prices and the need to be near amenities to entice employees back to the office.
San Francisco’s top employers, such as Salesforce, Uber, Visa, and Wells Fargo, have partially brought employees back to their offices, particularly in the financial district where the vacancy rate stands at 34.2% on the north side and 32.7% on the south side. However, the SoMa area, historically popular among venture-backed startups, faces an alarming vacancy rate of nearly 50%. SoMa’s distance from mass transit options and the departure of large retailers have contributed to its struggles.
Cushman & Wakefield’s report highlights some positive signs in the market, with absorption expected to improve in the second half of the year and office job numbers stabilizing after a significant decline. However, Robert Sammons, senior research director at Cushman & Wakefield, suggests that there is still room for rents to fall and vacancies to rise. The upcoming presidential election may also be a factor causing uncertainty and delaying new lease decisions.