Office Vacancy Rate in San Francisco Jumps the Most since 2009July 7, 2016
Citing the emergence of “slow or no growth policies” amongst both start-ups and more established local firms, the office vacancy rate in San Francisco jumped 1.6 percent in the second quarter of 2016, the largest quarterly increase since the first quarter of 2009, according to data from Cushman & Wakefield.
And in addition to 4.1 million square feet of truly vacant space, the amount of rented office space available for sublease roughly doubled over the past quarter to 1.5 million square feet, with tech firms accounting for 48 percent of those offering their excess space for rent.
On the demand side, new leasing activity in the second quarter totaled 1.3 million square feet, down from 1.4 million square feet in the first quarter and the slowest second quarter on record since 2009, while the need for those actively looking for space dropped from 5.5 million square feet in the second quarter of 2015 to 3.6 million square feet today, with 3.8 million square feet of new office space under construction in the city, a quarter of which is currently pre-leased.
And of course, employment in San Francisco has slipped, an emerging trend we first identified last year.
All that being said, the current office vacancy rate of 7.3 percent remains two points below the long-term average for San Francisco and the average asking rent, which Cushman & Wakefield notes is “slow to adjust in a quickly changing market,” ticked up 1.3 percent (86 cents) over the past quarter to a record $69.30 per square foot per year.
Comments from Plugged-In Readers
Very consistent timing with the number of online job ads, they peaked in Nov 2015 at around 5.5M and have since plunged to around 4.7M, which is now back to the level they were at in Dec 2012.
And here’s where there is potential for a double whammy. When price to income ratios are stretched and likely to revert to the mean, if there’s also a hit to the income side of the ratio you get valuations ratios and fundamentals shrinking at the same time.
Wow that’s like 3xOakland’s.
(of course some killjoys might point out that SF has more vacant space than Oakland has total space, so the comparison is meaningless, but why be a spoilsport ??)
SF has seen a lot of spillover of hi-tech from the SV. Paying too much for office space and workers in some cases. A hi-tech contraction and shift out of the Bay Area – which I think will happen over the next decade – will especially impact SF. As local hi-tech consolidates in the SV.
Beyond that the big employers have long since left or shifted their space absorbing workforce out of SF.
The Bay Area will remain the center of hi-tech just less so and, IMO, RE prices here will moderate and come more in line with the emerging alternate tech/ job enters.
The supposed 1 million or so population of SF in 2035. As projected. I have been dubious about that and if jobs start leaving and/or cease to grow I doubt it will happen.
i’d like to know if there’s any data at all behind all of what you said, or if it’s as well-sourced as your predictions about oakland supplanting SF, and your opinions about how building more units in SF is bad for the city.
I see no way that tech does not decentralize somewhat from the Bay Area over next 10 to 20 years. . Costs prove too much of a recruitment hurdle, even if prices were to drop 20%.
Saw a story in SF biz times today about this; companies are starting to move sales teams out of the Bay Area; cheaper talent.
Its logical this will happen. Some say SV will always be the center of tech. Nothing is forever. SF was a banking and stock market center at one time. Wall Street of the West. That is all gone.
IMO SV will keep the headquarters mostly and high paid administrative employees but groups like sales teams, as you mention, will be shifted out of the Bay Area. This is not just an SF story, it is a Bay Area story and its a story of business and political leaders failing to address the affordability, transportation and other quality of life issues. It was going to catch up to the Bay Area at some point and this may be that point. Only history will tell.
For RE investors the thing is, IMO, look where tech jobs are going to grow most over the next 10, 20 years. Look which cities millennials are being drawn to. Look at affordability. Look, we in the Bay Area forget this somewhat, at metro areas with diversified economies. Not over-reliant on tech.
No certain things are forever, real Wall Street is still in New York and not going anywhere.. Why are we not in the search of a new financial capital ? As long as Apple, Google and Facebook and all the Venture Capitalist who became rich because of these companies live in the Bay Area, SV is going to be the center of tech.
Silicon Valley and SF tech will never leave in our lifetimes. In fact, they will only get bigger. The conglomerate mega corporations will always stay near Stanford and Berkeley. These mega corporations’ wealth will permeate throughout the area and induce the sprouting of other tech firms. More “mom and pop” tech businesses will choose more affordable locales with good brainpower (Austin, Boston, North Carolina), but the center will always be in the Bay. Unless somebody is proposing moving Stanford and Berkeley?
So this is the boom that will have no bust?
Gorkem is bang on. Tech is all about the talent pool – I know, I’m in it. Try finding 100 engineers that are decent in a random part of the world – doesn’t happen, even with VR and all the tele-communicating. Tech people can afford to live here, they like it, if they can afford a house they’re not moving. (I own 2.. soon three)
SF is still the largest banking center of the west coast. How is it “gone”?
IMO, more likely there will continue to be dramatic boom and bust cycles just as there has been since the gold rush. As you point out, many of today’s tech companies will no longer be around in 10-20 years. But at some point there will be another boom time and new companies will sprout up.
Dave@ I guess you have not been following the local trend for the past five years. SF has increasee its population due to the millenials wanting to live in the City and work outside. Ever hear of the Google Bus? It is more than the technology companies to xpanding in SF but Bio-Science and medical services. So you are entitled to your options but in the end, they are your own opinions.
It is a myth that everyone would prefer to live in SF over SV. The fact is that property values are even more ridiculously high in central SV than they are in the City. Peninsula workers are priced out of the peninsula, they’d have to go to the less desirable areas like SJ or SSF. So that’s the real choice they are looking at.
It was counter-intuitive to me, but I recently read two separate reports that 30 somethings have a stronger desire to move to the burbs than they did 20 years ago.
[Editor’s Note: Or as we first reported a few months ago, Millennials More Likely to Buy in Suburbia, Not in the City.]
Hi tech like Salesforce, Twitter, Square, Uber, Airbnb, Twitch, Lyft, Dropbox are consolidating in SV?
Dave doesn’t really seem to understand the trends in high tech if he thinks it will consolidate BACK to SV.
Growth in high tech in SF started way back during the dot com boom, as the “creative” side of tech preferred locating in SF…it was basically an outgrowth of the design and advertising business that was always concentrated here, and was highly concentrated on web design and nascent web sales businesses (hello pets.com). As the movement gathered speed, more and more firms were born and developed here, covering areas like gaming, media, on-line retailing, and of course, most recently, mobile aps like uber.
This is not the Silicon Valley of yore which was based on computers and chips. The folks who work in these businesses often prefer to be in San Francisco and not in “campuses” in the burbs. The growth of these companies has been co-incident with an expressed desire of a large slice of millennials for urban living and all that it entails (and yes, hello Google bus to ship those millennials off to the huge SV campuses that of course still exist). In any case, it is unlikely that any of the tech HQ’s that SFRealist mentions will be moving to SV anytime soon, which is no cheaper than SF.
OF COURSE, over time, companies will disperse portions of their workforces to cheaper areas (Uber is already doing it), and the Bay Area generally cannot stay so absolutely dominant in all tech jobs, and new hubs will gain speed. What Dave is correct about is no trend continues forever, and SF will evolve over the coming decades.
None of the above (Twitter, Square, won’t be around in a few years as-is, will be much smaller; Uber and Lyft are also comets that will crash, IMO) , but if you didn’t know, overall there are far, far, far, far more tech jobs in SV than SF right now. Many companies, many startups too.
You’re refuting an argument I wasn’t making. Dave said companies would flee SF for SV. I pointed out that is not the case
Yes, there are many companies in SV too, and more tech jobs. That’s not the point here.
I was not as clear as I should have been. I meant a SV/tech consolidation in which companies in the SV with outposts in SF return some of those jobs to the SV. or on a broader scale a LinkedIn being taken over by an out-of-state company. Over time it would not be surprising to see LinkIn jobs leave the Bay Area. Their big footprint is SV and not SF.
Who knows what Twitter’s future is? Ripe for a takeover? What happens then. Uber is shifting jobs to Oakland already.
Uber is not shifting tech jobs to Oakland. Uber is expanding to Oakland (as it expands in SF and builds its HQ there). I’m not smart enough to know if Uber will be around forever, but at least in the short term it is in no way reducing its footprint in SF.
Yep and there will be new Twitters and Squares coming up. Here are some examples of high potential companies in the Bay Area. A majority of them are in SF.
Office rents and vacancy almost always move along long trend lines. So, while theres a chance this is a “head fake” it is rather –almost certainly– a the start of a long down turn in the office market. Again historically, that is an indicator of :
Rapid growth in sub lease and shadow ( leased but empty) space
Plateau then drop in commercial rents
Pickup in failure of business entities ( first small then larger)
Change in employment in SF (down)
Change in in-migration to SF (down)
Slackening of residential demand ( already seen that with more llstings)
Which is to say theres is a good chance this is a bellwhether of end of this real estate cycle, and to the degree that it is linked, the end of the boom economic cycle in SF.
No idea whether soft landing, hard landing, etc. but the up-cycle is likely over.
Most large lenders and investors should have adjusted their underwriting already. If there is one factor that will slow this trend on the investment side it is the prospect of long term very low debt.
I measure all this by overheard luncheon conversations in the Showplace Square/Potrero flats/SOMA. Lately its been like listening to the gladiators who earlier described how the lions were going without raw meat and growing restless… to who got eaten today. It makes for a tense dining environment.
jumps most since 2009, but chart starts at 2011? Nice graphics.
Socketsite only links to itself and not to its sources. If you’re interested see namelink.
Yes, but it contains the same chart (apparently a five year window is all C&W provides in their graphs)
I’m calling this the top, or somewhere a bit downslope from it. Know how I know? Just look at all the billboards on 101 coming into SF from the Bay Bridge. 6 months ago, and for 3 or 4 years prior, they were almost 100% tech. Now? Basically Apple is all that’s left, 80% of the other billboards have reverted to the usual: shitty hotels and casinos, shitty radio stations, Shell “V-Power” (?) gasoline, Virgin airways, etc. The Usual Suspects.
I’ll second that – noticed same this week.
UPDATE: Office Rents in San Francisco Drop for the First Time since 2010
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