Q4 2022 Office Space Report: San Francisco, CA

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San Francisco’s office space market is home to major companies like Uber, Lyft, and Instacart as well as nearly 40 other Fortune 500 businesses.

The unemployment rate was down from 2.6% to 2.4% quarter-over-quarter.

Its population declined for the second year, dropping about 0.5% from July 2021 to July 2022.

Inflation is continuously putting pressure on the city’s supply chain, driving up raw material costs and increasing delays for construction deliveries and tenant improvement projects. 

General Area Overview & Demographics

San Francisco has a population of 815,201 people. It is 49.7% white, 33.3% Asian American, 11.5% Hispanic or Latino, 6.2% African American, and 0.6% Native American.

The median household income in San Francisco is $96,265—much higher than the national average of $63,179. It also has one of the highest living costs in the United States, with a median home price of $1.4 million and an average rent of more than $3,400 monthly.

According to the U.S. Census Bureau, the median age in San Francisco is 38 years old, and over 18% of residents are 65 years and older. Of those under 18 years old, 24% are under five years old, while 35% are between 5 and 17 years old.

San Francisco is home to the University of California, San Francisco, the University of San Francisco, and California State University, Fresno. Other prominent institutions include Stanford University and UC Berkeley.

The Golden Gate Bridge and Alcatraz Island are both iconic attractions. Fisherman’s Wharf is another popular destination for tourists, featuring restaurants, shops, and boat tours that offer views of the Bay Area.

The average temperature in the city ranges between 50-60°F, with summer highs reaching 70°F. Winters are rarely cold as temperatures rarely dip below 40°F.

Summary of San Francisco Office Space Performance in Q4 2022

The San Francisco office market is moving away from lower-quality units, posting negative absorption for the fifth quarter in a row.

Negative net absorption was over 1.28 million square feet in Q4. Year-over-year, absorption went from negative 3.1 million square feet in 2021 to negative 5 million square feet in 2022.

Direct vacancy grew to an average of 18.4%. Class A was at 17.4%, Class B saw 19.5%, and Class C posted 19.7%. 

What are office space rents like in San Francisco?

The average asking rent for office space in San Francisco was down 1.5% quarter-over-quarter, closing Q4 2022 at about $73.65.

In San Francisco’s CBD, asking rent for Class A product decreased by 1.1% after the third quarter, ending in the fourth quarter at $77.31.

Class A product in suburban submarkets saw a rent increase of approximately $3.80 per square foot compared to Q3, ending Q4 at $85.10.

Tier 1 buildings experienced a significant decline in rent, going from $103.77 per square foot to $96.60 quarter-over-quarter.

Purchase & Leasing Activity

With slow leasing velocity and a rapid increase in interest rates, San Francisco didn’t record any major office sales in Q4 2022.

Leasing activity increased quarter-over-quarter from 706,100 square feet in Q3 to 733,000 square feet in Q4.

Over 64% of all leasing activity was for Class A product, and the CBD accounted for over 72% of the new leasing activity.

The highest-performing submarket for new leasing activity was North Financial.

Lease renewals were greater than new leases in Q4, accounting for nearly 760,000 square feet.

Notable Office Space Deals in San Francisco in Q4 2022

There were several lease deals for San Francisco’s office space properties.

These are select examples among other lease activities.

New Office Space Development Activity in San Francisco in Q4 2022

Approximately 23,800 square feet entered the pipeline in Q4 after Q3 started with no new projects.

After the deliveries in the third quarter of 2022, there were nearly 1.37 million square feet in development in the fourth quarter.

This is a significant increase when compared year-over-year to only 893,000 square feet in development for Q4 of 2021.

Market Forecast for San Francisco’s Office Space Market

Despite the decrease in tenant activity, requirements slightly increased to demonstrate that while tenants plan on returning to office space, they are also taking more thoughtful approaches to their allotted areas.

Technology companies are expected to decrease their need for office space, opening up opportunities in the market for various industries.

Rent abatements & lease concessions are becoming increasingly important for older buildings as lease terms evolve. Taking advantage of such offerings may be vital in helping generate leasing activity.

Takeaways for Office Space Investors

San Francisco appears to be a challenging market to break into with new offerings.

Lease renewals outpaced new leases, and no new sales activity took place.

For an investor looking to enter this market, a well-occupied Class A property in the CBD appears to be the most promising prospect.

Stay diligent and happy investing.

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