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SF’s office scene might not recover until 2042

Experts say it’ll take at least another decade (maybe two) for office vacancies to drop back to pre-pandemic levels

Two people walk in front of tall office buildings, one person wearing sunglasses and using a phone, the other carrying a backpack.
San Francisco still has the highest office vacancy rate in the nation. | Source: Morgan Ellis/The Standard

Imagine San Francisco 18 years from now. That’s more than four mayoral terms, at least one fashion cycle and nearly one Van Ness rapid bus lane project away. Generation Alpha—who will be adults—will likely be calling Gen Z “out of touch” by then.

And—according to new long-term projections from real estate firm Avison Young—San Francisco won’t be left with a glut of empty office buildings anymore. On that front, the situation midway through 2024 is pretty grim. The city has the highest vacancy rate of any major market in the country—at more than 30%. 

Using previous recovery periods as a model, the firm’s research team projected three possible years in which the city’s vacancy rates might again fall under double digits, as it was before the pandemic, when the office vacancy rate was considered relatively healthy.

The absolute dream scenario is 2030, which would require six consecutive years of record-level leasing activity. More realistically, if such activity ends up matching the same level as the early 2010s, things could return to normal by 2033. But anything less than that would push things back to as far as 2042. 

The point of the exercise wasn’t to “freak out” building owners, but instead jumpstart painful but necessary conversations, said Louis Thibault, a senior market intelligence analyst for Avison Young. 

“We need to level-set with people so that they don’t sit on their hands for too long,” he said. “If an owner can’t afford a building without tenants for that long, then it’s time to find the highest and best use for it or move on.” 

Not everyone is convinced of the tactic.

A man in a floral shirt walks towards a bank of elevators, while four other people stand or walk near the elevators in a modern, well-lit lobby with a large plant in the foreground.
San Francisco has only recovered about half of its pre-pandemic office traffic according to cell phone tracking data. | Source: RJ Mickelson/The Standard

When shown Avison Young’s predictions, brokers at other firms said they could not imagine telling clients to hold out for another two decades.

At least publicly, anything short of an optimistic spin is taboo in the real estate industry where building owners are desperate for any sign of positive momentum in the face of an unprecedented downturn. 

For their recovery projections, Thibault and his team examined periods following the dot-com crash and the Great Financial Crisis, where San Francisco emerged out of similar periods of high vacancies and mass layoffs.

For example, in the 10 years preceding the pandemic, the city averaged 1.3 million square feet of net absorption annually, with the highest coming in 2018, when tenants finished the year taking up 3.7 million square feet more than they vacated.   

Those numbers flipped after 2020. The city’s office tenants have shed an average of 5 million square feet of office space annually through 2023. 

Put in physical terms, some 30 million square feet (and counting) remain empty today. As a visual aid, that’s the equivalent of more than 500 football fields of space or more than 20 Salesforce Towers. 

Thibault is the first to admit that Avison Young’s recovery model is overly linear and superimposes previous expectations onto a still-uncertain future. During the 2010s for example, when interest rates were low and investors were flocking to startups, it was common for emerging companies to sign new office leases even if the space wasn’t needed yet just to project growth or keep up with competitors who were doing the same. 

People walk along a busy city street, surrounded by tall buildings and a reflective, geometric-patterned skyscraper. Traffic signals and shop signs are visible.
San Francisco's total office inventory will likely contract as functionally obsolete buildings are taken off the market. | Source: Morgan Ellis/The Standard

That is no longer the case, as the same giants who turned San Francisco into the world’s premiere tech destination last decade are now the same ones leaving in droves. Despite the rise of A.I. and a small stream of new leasing activity driven by discounted rents, the city is still a ways off from achieving net positive office absorption again.

According to data from analytics company, which uses cell phone data to measure foot traffic, visits to San Francisco office buildings are still down 50% compared to the same time in 2019. However, visits are up 13% since last year. 

The city’s overall office stock is likely to fall, experts say, as some get converted into other uses. Avison Young estimates some 10 million square feet of “functionally obsolete” office buildings might be pulled from the market, which would lower vacancy rates by decreasing the denominator.

Thibault explained that longtime family building owners are better positioned to pivot their properties than newer landlords constrained by larger debt obligations as they purchased buildings at the top of the cycle. 

Even if they wouldn’t have called their shot like Avison Young did, five other real estate experts consulted by The Standard agreed it will probably take much longer than city leaders would like to admit for the office market to get back on stable footing. A decade-plus was not out of the question, experts said.

“We’re going to be saddled with structural vacancy for quite some time,” said a researcher at a competing firm. “Because of the normalization of remote work, the situation today is unlike anything we’ve ever seen before.”