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San Francisco's Office Market Has One Of Its Worst Quarters Since 1997

The skyline of San Francisco in the evening

San Francisco's office market slid even further in the second quarter of 2023, clocking net negative 2.2M SF of absorption, making it one of the worst quarters on record for the market.

“That's the third-worst quarter since record-keeping started at CoStar [in] 1997,” Transwestern Senior Research Manager George Entis said. “Big companies gave up big blocks of space, renewing for smaller spaces. That seems to be the trend.”

That 2.2M SF represents almost 10% of the total negative absorption experienced in the office market since early 2020. In that period, the market's net negative absorption reached 20.3M SF, according to Transwestern's Q2 report. 

The big companies giving up space are concentrated in the technology industry, where despite decent earnings and a tightening labor market, the new realities of remote and hybrid work have dented demand for office space. 

Kastle Systems, which tracks office usage in major metro areas across the country, noted about 45% of workers are swiping into offices in San Francisco, a plateau from the first quarter. This indicates that while many companies are demanding employees return to work, more than half of workers in San Francisco’s technology-laden industries still work from home. 

“Business leaders have had to accept that hybrid work is a permanent reality now,” Entis said. 

Nick Bloom, an economist from Stanford University who specializes in work-from-home trends, echoed Entis’ comments in a tweet earlier this month. 

“Work From Home has been flat through 2023,” he said. “The return to office push seems to have died.”

The new reality for workers and employers has caused several companies to shed office space. Sublease availability went up to 11.5%, Entis said. Other companies have chosen not to renew leases and are looking to downsize. 

The office vacancy rate stands at 31.6%, a historic high for San Francisco, according to the report. 

“I don’t think there is anything to suggest the story ends here,” Entis said. 

One of the issues affecting San Francisco specifically, according to Entis, is its tax structure. 

"Why choose San Francisco when its local taxes are so outrageously high?" Entis said. 

San Francisco Controller Ben Rosenfield issued a report this week that said the city needed to look at revamping its tax structure to spur business activity in the downtown corridor. It noted the city created new taxes during the 2010s, when the technology boom was in full swing. During that time, the city became reliant on large taxes from a small number of taxpayers, the report said. 

“Structural changes in the city’s economy, and policy choices to make the tax system more progressive, has had the effect of raising overall revenue volatility by concentrating revenue in a few payers,” Rosenfield’s report states. “This runs counter to a long-standing City policy goal of minimizing volatility by broadening the tax base.”

The report further argued the city has derived from a disproportionate amount of its revenue from office market sales and leases.

“Remote work has led to a reduced volume of transaction of these properties, and there is some evidence of a marked reduction in property values,” the controller's report states. “Both trends lead to revenue weakness for the city.”

Entis speculates the new reality for the city could accelerate changes to its tax code, which will eventually prompt more activity in the office market, but that day could be far off. 

“That process is not going to take a quarter or a couple of quarters,” he said.