Glut of San Francisco Office Leases with Peak Pricing Expiring

San Francisco office building owners hoping that a surge in demand from the GenAI boom will lift the city’s office market out of record-high vacancies and available space are fighting an uphill battle.

A wave of leases that pre-date the pandemic—and were signed at pre-pandemic prices—are likely to offset the impact of the tailwind from the AI boom, a new report suggests.

Nearly a third of the existing office leases in San Francisco are set to expire by the end of 2025. According to a report from Savills analyzing CompStak data, these will include a glut of leases that were signed in 2018 and 2019 with pricing that reflects the previous market peak.

According to CompStak data, nearly 85% of the office leases coming due in the city by the end of 2025 were signed prior to 2020; 32% of the leases coming due by 2025 were signed during the previous market peak in 2018 and 2019.

The city’s office market has been trending to a continued decrease in transaction size and lease term lengths, Savills said. Transaction sizes were down by nearly 43% in 2023 compared to 2019, while lease term lengths have dropped by 15.7% for the same period.

“The recent office leases signed by AI companies and future demand from other active AI companies are a welcome tailwind for the battered San Francisco market [but] the tech subsector is still unlikely to be enough to carry the market to smoother waters for the time being,” the report said.

Nearly 1M SF of office leases have been signed by AI companies in San Francisco in the past two years, including deals inked in Q4 2023 by Gen AI leader OpenAI for 487K SF in Mission Bay and Anthropic for 231K SF in the Financial District.

However, six of the seven top AI leases have involved subleases for space given up by other tech companies, including Slack, Uber and Okta, the report noted.

“Companies in a position to grow and lease office space are taking advantage of weakened office market dynamics. Astute tenants recognize the value proposition intrinsic in subleases, from discounted rental rates (compared to direct market rates) to capital cost avoidance (for spaces that have already been built out and furnished),” Savills’ report said.

Office availability in San Francisco surged to a record high of 36.7% at the end of the fourth quarter, with nearly 9M SF of sublease space available—about 80% of which has been returned to the market by tech tenants, the report said.

On the brighter side, tech employment compared to pre-pandemic levels is growing faster in San Francisco than in other major tech hubs. Compared to February 2020, the number of tech workers in the city has grown by 13.5%, far outpacing Boston, which only rose 1.9% during the same period.

“While current office space utilization remains below historic levels, this level of technology employment above pre-pandemic could boost office demand going forward with any positive change in return to office trends,” the report said.