San Francisco Office Market Report

4th Quarter 2023

Posted In — Market Research | Market Report


The San Francisco office market is reporting its ninth consecutive quarter of negative net
absorption, approximately negative 7.3 million SF year-to-date, with this quarter accounting for
over negative 2.2 million SF, greater than any quarter in 2023. Total office vacancy continues to
rise and currently sits at 30.8% – up 230 basis points (bps) quarter-over-quarter. The continued
popularity of subleases for companies wary of long-term commitments outpaced supply
this quarter with the sublease vacancy rate decreasing 30 bps to 5.8%. However, sublease
vacancies have increased by 60 bps year-over-year, cautioning against attributing this drop
to a fundamental change in long-term sublease supply and demand dynamics.

Leasing activity throughout the quarter grew year-over-year by 31.5% to 2,106,599 SF.
Class A and B office buildings led leasing activity, accounting for approximately 72.8%
(1,534,343 SF) and 24.1% (508,273 SF) of total leasing activity, respectively. Throughout the
market, rental rates continue to decline as average direct rental asking rates fell to $53.26/sf.
Within the Financial District, direct rental rates for Class A and Class B spaces have fallen to
$56.14 /SF and $52.28 /SF respectively. Despite the dip in rental rates, there is a large
discrepancy in pricing with very limited compression. Overall, the office market continues
to bifurcate as premier Class A offices with desirable amenities regularly rent for above $80
/sf full service and average direct rental asking rates for Class B and C offices have fallen to
$46.96/ sf and $39.72 /SF full service respectfully.

813,924 SF of office properties traded hands for $186 million throughout the quarter. This
represents the second highest quarterly square foot total since Q2 of 2022 and the second
highest quarterly sales volume (in dollars) of 2023. Two large transactions occurred this quarter
which together account for over 67% of the sales volume (in dollars) during this period. 123
Townsend Street sold for $72 million ($525.74/SF) and 180-182 Howard Street sold for $54
million ($221.84/SF). The investment sales market remains depressed with 2023 showing a
36% year-over-year dollar sales volume decline from 2022 figures and over a 90% decline
from pre-pandemic figures. High interest rates continue to exert downward pressure on the
market, though recent Federal Reserve projections of one or more rate cuts in 2024 may
signal future relief.


The unemployment rate throughout San Francisco continued to tick up slightly, reaching 3.5% in November, 30 bps higher than the 3.2% in July. Throughout 2023, the unemployment rate in the city has grown from 2.7% to 3.5% indicating a gradual deterioration in the labor market. Tech/Information industry layoffs constitute a large portion of lost jobs in 2023 but have slowly been surpassed by layoffs in the professional / business services sector according to data from California Employment Development Department.

Inflation has exhibited an above-expected decline in recent months, though it remains above the Fed’s long-term target. This said, the decline has been enough to avoid any further rate hikes in Q4. Despite this decline, inflation remains high, and the effects of two years of robust price increases continue to contribute to layoffs, supply chain strain, and high raw material costs used in construction, the latter of which is delaying delivery times and tenant improvement projects.


Office occupancy in San Francisco for the week of December 13th was measured at 46.7% according to data from Kastle Systems, a company that tracks building occupancy through its access card systems. While occupancy has varied throughout 2023, it is mostly flat compared to the 42% reported in December of 2022 and appears to have leveled out in the mid 40% range, significantly below pre-pandemic levels.

Amidst ongoing office space optimization, demand for sub-10,000 SF spaces remains competitive, especially for suites under 5,000 SF. Limited tenant movement persists, with renewals and downsizing prevalent, but the growing presence of new Artificial Intelligence companies brings optimism. One such company, OpenAI, recently signed a 486,600 SF sublease from Uber in Mission Bay, resulting in one of the largest office leases the city has seen since 2018. Additionally, Anthropic, another AI company, recently leased 230,325 SF at 500 Howard. That said, despite these two large leases, vacancy continues to rise and absorption remains negative.

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