San Francisco’s office real estate market is in turmoil, with record-high vacancy rates and plummeting rents, despite a recent influx of artificial intelligence (AI) companies.
Recent data from Cushman & Wakefield paints a grim picture: office vacancy rates have soared to 34.5% in Q2 2023, up from 28.1% a year ago and just 5% pre-pandemic.
Average asking rents have dropped to $68.27 per square foot, the lowest since 2015 and well below the 2020 peak of $84.70.
The tech industry, once San Francisco’s economic engine, has been hit hard.
Over 530,000 tech employees have lost their jobs since early 2022, with major players like Alphabet, Meta, and Amazon leading the layoffs.
This exodus has left vast office spaces empty, particularly in areas previously bustling with startups and established tech firms.
While the AI sector offers a glimmer of hope, it’s not enough to reverse the overall trend.
Robert Sammons of Cushman & Wakefield notes, “San Francisco is certainly the center of AI, but AI is not going to save the San Francisco commercial real estate market. It will help.”
Vast swaths of office space in San Francisco have been left empty after a big shift to remote working leaving record office vacancies. Can artificial intelligence stem the exodus? https://t.co/l7Iuc3jKVN pic.twitter.com/33Fn8e5aId
— Financial Times (@FT) May 24, 2024
Indeed, AI giants like OpenAI, Anthropic, and Scale AI have leased significant office spaces in the city.
OpenAI’s 500,000 square foot lease in Mission Bay last October marked the largest office deal in San Francisco since 2018.
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However, these success stories can’t mask the broader downsizing trend.
Many companies are opting for smaller, higher-quality spaces in prime locations as they adapt to hybrid work models.
The financial district has seen some improvement as major employers implement partial return-to-office policies, but the SoMa district now faces a staggering 50% vacancy rate.
San Francisco’s problems run deeper than just pandemic effects or tech industry shifts.
Decades of progressive governance have created a challenging business environment, from high taxes to out of control strict regulations and a growing homelessness and crime crisis.
The vacancy rate for San Francisco office space has reached a new record of 34.5%. pic.twitter.com/z92EwNfdDV
— Benzinga (@Benzinga) July 9, 2024
The upcoming presidential election adds another layer of uncertainty.
Sammons suggests, “Sometimes tenants postpone making decisions when there are major elections.”
While there are some positive signs, like stabilizing office job numbers, the overall outlook remains bleak.
Until San Francisco addresses its fundamental issues – including outdated zoning laws, heavy handed business regulations, and extreme public safety concerns – the commercial real estate market is likely to continue struggling.
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As a reminder the last Republican mayor of San Francisco, George Christopher, left office in 1964.
