San Francisco Office Vacancy Nearly 36% in Fourth Quarter

We hate to stick a lump of coal in somebody’s stocking on the cusp of a holiday, so we’ll preface this bad news with a promise that things are going to get better in the new year.

The vacancy rate in San Francisco’s battered office market set a new record in the fourth quarter, ticking up to 35.9%, a 2% jump from the previous quarter, according to preliminary data from CBRE, the San Francisco Business Times reported.

Negative net absorption in the office sector totaled 1.4M SF in Q4, which brings the 2023 total to a yawning deficit of 6.7M SF, the worst performance in San Francisco’s 88M SF market since the onset of the pandemic in 2020, when the city recorded negative net absorption of 9.9M SF.

Office availability, which measures all available space whether it’s vacant or not, is nearly 39%, up from 37.5% in the third quarter. The increase in the vacancy rate and availability were driven by the listing of several large blocks of space for sublease as well as tenants who declined to renew their leases, the report said.

Microsoft and Adobe joined the ranks of tech firms listing space for sublease in the fourth quarter. Microsoft listed 130K SF at 1355 Market Street; Adobe listed 156K SF at 100 Hooper Street.

Asking rents for San Francisco office space, which were as high as $90 per SF in the pre-pandemic years, declined to about $70 per SF in Q4.

The outlook for San Francisco’s office market is widely expected to improve in 2024 as the boom in generative AI brings tech workers back to the city. How quickly this turnaround can generate positive quarterly office occupancy statistics is hot subject among real estate analysts.

CBRE is on the conservative end of the projections, predicting that office occupancy losses will continue through the first half of 2024 and then stabilize in H2 2024, the Business Times reported.

Others are more optimistic, noting large lease commitments among the top generative AI players. After resolving a dispute among its directors, industry leader OpenAI remains committed to occupy 487K SF at Uber’s Mission Bay headquarters complex. The deal for two buildings at 1725 Third Street will provide the ChatGPT creator with enough space to house up to 2,000 workers.

OpenAI’s biggest competitor, Anthropic, has agreed to occupy the former Slack headquarters building at 500 Howard Street in a sublease encompassing 230K SF. Slack’s HQ went on the city’s overloaded sublease market soon after Slack was acquired by tech giant Salesforce in 2021 for nearly $28B.

Hive AI, a software company that uses AI to modify digital content, recently subleased 57K SF of office space at 100 First Street in a building that has been on the sublease market for nearly two years, according to a report in CoStar.

JLL has mapped more than 80 AI companies that currently are operating in San Francisco. While most are located downtown, about two dozen companies have located near the intersection of the Mission, Potrero Hill, Showplace Square and West SoMa, which is becoming known as “Area AI.”

According to CBRE, AI companies have accounted for 28% of the city’s total office leasing activity this year.