San Francisco Office Vacancy Rate Plateaus at 37%

The vacancy rate in San Francisco’s office market remains at a record high level—but it does appear to be leveling off.

According to preliminary data from CBRE, the office vacancy rate in the city ticked up by 0.3% in the second quarter to 37% while the office availability rate rose to 39.4%, also a 0.3% increase over the equally dismal first quarter numbers.

Colin Yasukochi, head of CBRE’s Tech Insights Center, described the changes as “incremental” and said they suggest that San Francisco’s office market may be approaching stability, the San Francisco Business Times reported.

With stability defined as a record-high plateau, it’s important to remember that an office recovery in San Francisco will not be defined by a return to the pre-pandemic vacancy rate: a record low of less than 5%.

The glimmer of hope in CBRE’s Q2 2024 market report is found in tenant requirements, the overall amount of space prospective office tenants sought during Q2, which rose to 6.9M SF from the first quarter total of 6.4M SF. Both numbers are a big improvement over the Q2 2023 total of 4.5M SF.

We call it a glimmer because Yasukochi told the Business Times that tenants who are looking for space in San Francisco are only expected to generate 10% in net new demand—because many who are shopping for space are downsizing their footprints or renewing leases for the same footprint.

Before the pandemic hit, tenant requirements were a reliable indicator that translated into about 60% of net new demand.

Office tenants are continuing to give up more space than they lease in the city, with net absorption totaling negative 442K SF in the second quarter.

Demand from San Francisco’s artificial intelligence sector continues to be the primary driver of the office market, with AI players accounting for a quarter of all leasing activity this year, the same percentage as last year.

In May, Scale AI, a San Francisco-based artificial intelligence data-scaling company, inked a deal to sublease three floors, or about 180K SF, from Airbnb in Showplace Square.

The deal for the space at 650 Townsend Street more than tripled the footprint of Scale’s existing HQ in the city. Scale’s new lease runs for 7.5 years, which is past the 2027 expiration date of Airbnb’s lease in the building.

Last fall, ChatGPT-maker Open AI cut a deal to sublease two buildings at Uber’s Mission Bay headquarters complex, taking nearly a half-million square feet in the largest office lease since 2018. In September, Open AI chatbot competitor Anthropic inked a deal to sublease Slack’s 230K SF headquarters in downtown San Francisco.