San Francisco can’t bounce back as office vacancies reach all-time high

San Francisco’s once-booming, 88-million-square-foot office market is feeling more like a ghost town as vacancies soar to unprecedented heights, leaving the city’s skyline looking emptier than ever.

According to the latest data from CBRE, office vacancy rates in the City by the Bay hit a staggering 36.6% in the first quarter, marking a 1.3% increase from the previous quarter.

This surge in vacancies has pushed San Francisco’s office market into uncharted territory, with availability — which includes both vacant and occupied, but available, spaces — rising to 38.7%.

It’s a stark contrast from the not-so-distant past when San Francisco’s office market was bustling, with vacancy rates hitting an all-time low of 4% in the first quarter of 2020.

But then came the pandemic-induced shift to remote work, led primarily by tech giants, which has since left many office buildings eerily quiet.

Yet, amid the vacant desks and echoing hallways, there’s a glimmer of hope.

Despite the surge in vacancies, the demand for office space in San Francisco is on the rise, according to Colin Yasukochi, executive director of CBRE’s Tech Insights Center in the city.

“The demand really dictates where the market is headed,” Yasukochi told the San Francisco Business Times. “Any time we have a downturn, it’s usually because demand has gone negative. The level of tenants in the market has gone up, and that is, at least right now, showing a positive growth.”

Indeed, tenant requirements — the amount of office space tenants are seeking — surged to 6.3 million square feet in the first quarter, up from 4.2 million square feet in the previous quarter. This uptick in demand signals a potential turnaround for San Francisco’s struggling office market.

However, despite the increased demand, the city’s office vacancies continue to climb. The leasing activity during the quarter dropped to 1.3 million square feet, down from 2 million square feet in the previous quarter.

Based on current tenant requirements, CBRE predicts that leasing activity could reach 6.5 million square feet by the end of the year, offering a glimmer of hope for landlords.

Yet, challenges remain.

The amount of subleased offices dropped to 9.1 million square feet in the first quarter, putting further pressure on landlords to lease more space directly.

And with annual average asking rents expected to fall further this year, landlords are facing an uphill battle to attract tenants in a market that’s still grappling with the aftershocks of the pandemic.