San Francisco is a city that I have never lived in (I am a Chicagoland lifer) but have visited often and have always loved. Yet anyone who has strolled through downtown San Francisco in recent years knows the city has challenges.
The latest data from commercial real estate research firm CBRE shows that one of the city’s biggest challenges – office vacancy – is only getting worse.
According to an article last week in the San Francisco Standard, the city’s office vacancy rate hit 37% in the second quarter (yikes), up a tick from 36.7% in Q1.
There are likely many underlying causes for rising office vacancies – downtowns struggled long before the pandemic. But we all know that Covid and the lingering popularity of remote and hybrid work are major factors in emptying office buildings. And this is the case not just in SF but across the country and around the world.
As we’ve often said, the office crash is a uniquely local story. Every under-occupied office building has second-order impacts. All those boutiques, dry cleaners, cafes, bars, etc. lost their natural available market. This whole thing has been a drag for small businesses.
The latest vacancy figures suggest CEOs forcing workers back into their cubicles isn’t moving the needle for CRE. Or is it? (See below.)
Back to San Francisco
Not surprisingly, there are serious consequences to these stubbornly high vacancy rates. One of these is a dramatic drop in the selling price for some office towers.
According to the Standard, one SF building sold at a 90% discount off its previous (2016) sale price. I mean, 90%? That takes your breath away.
Yet, the same Standard article also shines a ray of hope. For the office market that is. After all, once you hit bottom, is there anywhere to go but up?
The Standard cites a CBRE analyst saying that the office market, broadly speaking, is in the “early stages of a recovery.”
Some of the factors cited in this tenuous recovery include a peaking of supply and growing tenant demand signals. Yet the prospect of a full office market recovery remains “many years into the future.”
So it appears that San Francisco, or any other big city for that matter, probably can’t count on its hollowed-out downtowns recovering anytime soon. It still may not yet be a good time to open up a downtown dry cleaning shop. But perhaps there is at least a glimmer of hope.
