San Francisco Office Rents Fall 9%

San Francisco’s office market has continued to deteriorate this year. According to the fourth quarter report from Marcus & Millichap, office rents will fall 9% to 54.90 per square foot. This exceeds the 8.5% mean rate of rent decline last year. While the metrics don’t look great, the report was optimistic that a full recovery would come to the market.

First, the bad news. The 9% dip in office rents stems from an onslaught of new office deliveries. This year, the office inventory has grown by 3.3% with 5.7 million square feet of new stocked completed. While construction is slowing, there is still a pretty substantial pipeline product underway.

The new construction activity is also putting upward pressure on the market’s vacancy rate. In the fourth quarter, it will increase another 510 basis points to 20.5%. Last year, vacancy increased more than 600 basis points, and it didn’t slow in 2021.

In addition to new construction, many companies are rightsizing in response to changing workplace strategy as a result of the pandemic. According to the report, Salesforce backed out of a lease at 550 Howard St. and is sub-leasing hundreds of thousands of square feet; Pinterest paid $90 million to terminate its 490,000-square-foot lease; and Twitter is subleasing 100,000 square feet. Marcus & Millichap estimates that it will take several quarters for the market to absorb this supply.

Now for the good news. The report calls all of these challenges “temporary headwinds” and it has a “bright” long-term outlook. It estimates that companies will return to the market to take advantage of the discounted pricing and in-place infrastructure. The buildings are already designed and equipped to accommodate tech companies, which could help to expedite the recovery. One positive sign: major firms aren’t exiting the market, even if many are reducing held space.

This market assessment has been part of the recovery story for San Francisco the entire year. Many outlets estimated that San Francisco would eventually recover after several challenging quarters—and that story is coming true. Plus, in the third quarter, office leasing started to gain momentum. At that time, office leasing volume exceeded 1 million square feet for the second consecutive quarter since the pandemic started. In the third quarter, 2 million square feet was leased in the market, a 74% increase over the second quarter when leasing volume also surpassed 1 million square feet, according to research from Savills.