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A Transwestern report on the performance of San Francisco's office market in the second quarter paints a sobering picture more than two years into the remote work experiment that the city's all-important tech companies have embraced.
The report shows that despite the general optimism of the commercial real estate industry that the market would begin to turn around, brokerages may have to recalibrate their expectations and begin adjusting to a new normal rather than waiting for a mass return to the office.
The report notes that on the bright side, the number of office-using jobs is up 7.9% from last quarter, reaching 508,000, up from the report's five-year average of 468,000.
George Entis, senior research manager for Transwestern, said he expects these trends to continue.
“I’m not really sure if people want to go back to the office the way brokers do,” he said.
Sublease availability, leasing volume, net absorption, the overall vacancy rate, asking rents and venture capital are moving in the wrong direction for an office comeback to be in the offing.
Negative net absorption in particular is troubling, dropping to 762K SF in the second quarter of 2022. That is a 118.4% increase from the 350K SF of negative net absorption recorded in the same period in 2021.
The overall vacancy rate also climbed from 17.4% to 20.7%. Rents for Class-A properties, despite being the most in demand amid the flight to quality, still dropped by 4.8% from last quarter.
“The amount of vacant office space that’s come onto the market since this whole office mess started I calculated at seven and a half Salesforce Towers,” Entis said of San Francisco’s office market.
The amount of new office space under construction in San Francisco also dropped dramatically, decreasing by 54.9% from last quarter.
Transwestern’s report also notes that venture capital funding in San Francisco is down dramatically — by 41%, to be exact — and isn't likely to increase soon.
“VC funding decline is a result of investors preserving capital with rising rates," Entis said. "Cash is king. Cash is harder to get, and returns in CD and bond markets are abysmal. There are safer avenues to put your money."
Despite calls for Big Tech to pick up the slack, the vacancy losses in the market continue to mount, and though other industries have trickled into the Bay Area in search of leasing deals, the amount of interest will be unlikely to fill the void left during the Big Tech exodus.
Entis also said that while touring activity is down, companies are continuing to look for smaller space, with the most common number gaining interest being 10K SF and under. Entis speculated that the flight-to-quality trend for office space will continue to push demand for any space below Class-A into nonexistence.
“Class-C is becoming useless,” he said.
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