Has San Francisco’s Office Vacancy Peaked?

As of December 2023, San Francisco’s office vacancy was at 36.2%. Avison Young’s analysis suggests that this has peaked and is expected to drop below 35.0% by the end of 2025. Marking a turning point, this forecast hints at a positive shift in the city’s office space dynamics.

Tenants preparing to vacate their leased spaces often take the initiative to list their properties on the market well in advance of their lease expiration, providing an early indication of future market availability. However, recent findings by Avison Young reveal that approximately one-third of spaces set to expire within the next two years have yet to be listed. This introduces a concept known as “shadow vacancy,” wherein the future status of these spaces remains uncertain, and a substantial amount of unlisted space is anticipated to become vacant in the market.

In San Francisco, there is an impending expiration of office leases totaling an estimated 15.5 million square feet within the next two years. Approximately 41% this space has already been vacated or proactively marketed for lease, which is accounted for in the current total market vacancy rate. However, the fate of around 5.2 million square feet of lease expirations remains ambiguous; these are the tenants that have not had their space put on the market but have also not yet renewed their lease. Diving deeper into these leases may provide us an indication of the direction market vacancy will move in the future.

Leveraging Avison Young’s local brokerage insights and our proprietary real estate technology tool, AVANT, we examined this unaccounted-for space to determine which tenants we predict will renew, expand, downsize, or vacate. Additionally, we took on a retrospective analysis of leases that expired in the previous two years, from 2022 to 2023, to provide context on how the data has evolved to date.

Our analysis projects that approximately 35% of the 5.2 million square feet of unlisted space lease expirations in the next two years will become available for lease. In comparison to the 60% vacancy rate observed for the 16.1 million square feet of space that expired in the previous two years, this points to a significant improvement in the state of the San Francisco office market. The data indicates that the period from 2022 to 2023 represented the worst of the downturn, signaling a positive shift in market conditions.

Adding another layer to this analysis is the consideration of future leasing activity. Currently, tenants actively seeking space in the market present a significant potential for transactions, totaling nearly 5 million square feet. Despite lackluster activity last year, current demand is robust, standing at levels not seen since before the pandemic, indicating a higher likelihood of market improvement rather than further decline.

By combining the improving space retention of future lease expirations and strong pent-up demand, we forecast that market vacancy will begin a very slight decline in 2024. We estimate there will be a decline in vacancy by about one percent by 2025. While the recovery may start off slow, we anticipate an acceleration toward a full recovery approaching over the next ten years. Avison Young maintains a bullish stance on the San Francisco office market, as its unique fundamentals, such as proximity to a highly educated talent pool and unmatched geography, continue to position it as a market filled with opportunities.

Howard Huang is a Market Intelligence Analyst for Avison Young and  Mark McGranahan is a  Principal with Avison Young.