Why San Francisco Office Owners Are Optimistic

San Francisco office owners are finally seeing the light—or at least a glimmer in the distance. In the second quarter, office leasing activity totaled 1.1 million square feet, more than twice the previous quarter’s leasing activity, according to a market report from Savills. More than half—59%—of the leasing activity was for new locations, and 61.5% of the leases were signed by tech companies.

The return of tenant demand is an indicator that a recovery is underway, however, the report is quick to note that demand is still significantly below pre-pandemic levels, and Savills called the market fundamentals “shaky at best.” The office vacancy rate was 26.3%, up from 13.5% in the second quarter 2020 and up 270 basis points from the previous quarter. Class-A vacancy has climbed 330 basis points to 24%. By comparison, the vacancy rate pre-pandemic was 9.5% overall and class-A vacancy rate was only 8.8%.

Asking rents have fallen 8.5% to $72.55 per foot, down from $79.31 that same time last year. Class-A asking rents have also fallen substantially to $75.45 compared to $83.68 at the same time last year. The vacancy rate will keep downward pressure on rents, and Savills expects prices to fall until “meaningful” net absorption occurs.

While the fundamentals don’t paint a rosy picture, the success of the vaccine roll out and the early return of tenant demand has been enough to give landlords hope of a full recovery. Facebook, Apple, Amazon, Microsoft and Bank of America have already begun to return to work, and while many have implementing a hybrid policy to allow some workers to work remotely, office work remains part of the model. Long-term, there is still a lot of uncertainty, and Savills says that tracking the physical reoccupation of unused space will be an early indicator.

While there are some good indicators of future demand, Savills says that the market will take time to reabsorb the substantial amount of space lost during the pandemic. Despite continued vaccine distribution, the report expects the market to favor tenants for the “foreseeable future.”

San Francisco was devastated by the pandemic, and was among the most impacted markets in the country. One measurement of the contraction was the substantial sublease space, which accounted for more than half of the market’s available office square footage. At the end of the first quarter, demand for sublease space was sparse, according to an earlier market report from Cushman & Wakefield.