MARKET DRIVERS
NET ABSORPTION was negative for the fifth consecutive quarter as the San Francisco office market continued its flight to quality trend as concerns grow from an impending recession and an uncertain economic outlook in 2023. Many tenants need to navigate economic uncertainty, coupled with the current work-from-home trends, whether that’s finding premier Class A space to incentivize staff to return to the office, “right-sizing” by subleasing existing space to accommodate their current (smaller) workforce, or looking for shorter term leases or subleases to stay nimble. This uncertainty led to negative net absorption in Q4 of 1,284,611 SF. Quarter-over-quarter, total net absorption fell from negative 1,717,364 SF, however total net absorption in 2022 totaled roughly negative 5 million SF, compared to the negative 3.16 million SF reported in 2021.
LEASING ACTIVITY totaled 898,920 SF in 4Q 2022, a 59% decrease from this time last year (2,206,001 SF). Direct vacancy continued to grow, reporting 18.4%, an increase of 100 basis points (bps) quarter-over-quarter. Sublease vacancy also increased by 30 bps quarter-over-quarter and 100 bps year-over-year to 5.3%. Class B and C offices are reporting direct vacancy rates of 19.5% and 19.7%, respectively. The direct vacancy rate for Class A is a touch lower, at 17.4%. Class A and B offices in the Financial District have an average direct asking lease rate of $60.93 PSF full service, dropping by 8.2% year-over-year. Looking at all submarkets throughout the City, offices are reporting an average direct asking lease rate of $54.99 PSF full service.
UNDER CONSTRUCTION office space currently totals 1,369,668 SF. The largest project is Mission Rock Buildings B and G, totaling of 613,952 SF, slated for delivery in mid-2023. Building G is pre-leased to Visa.
ECONOMIC REVIEW
UNEMPLOYMENT in San Francisco remained steady at 2.2%, as of November. Despite recession concerns, the labor market remains relatively vigorous. That said, it remains to be seen how the unemployment rate will be affected by the recent news of layoffs from a variety of companies, including Bay Area tech firms DoorDash, Kraken, and Twitter, among others.
INFLATION has been on the rise throughout 2022, leading to several interest rate hikes. The rise in inflation continues to strain the supply chain, causing the cost of raw materials used in construction to increase, further delaying delivery times and tenant improvement projects.
NEAR-TERM OUTLOOK
OCCUPANCY RATES have plateaued over the past few months according to data from Kastle Systems, a company that tracks building occupancy through its access card systems deployed in buildings around the country. In mid-December the San Francisco metro has a weekly occupancy rate of 41.8%, up by 1.1% from mid-September, and substantially up from early June, when it was only 34%. Recently, occupancy rates have ranged between 40-45% (+/- half the pre-Covid occupancy rate and the 2nd lowest in the country, with San Jose at the bottom).
Many larger tenants in San Francisco continue to shed space, including Pinterest, which most likely will not renew at 410 Townsend Street. Databricks, Sigma Computing, and Parnassus Investments recently expanded their San Francisco office footprints, though for now, these appear to be outliers, rather than demonstrations of a new trend.
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