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SF’s office vacancies just hit a new all-time high. But the ‘Great Reset’ has begun

There could be a light at the end of the tunnel for the city's record-high vacancies.

The image shows a reflection of tall buildings in a glass surface, with a partly cloudy sky and blue patches visible above.
New data solidifies SF’s unfortunate reign as the country’s leader for empty office space, but there could be light at the end of the tunnel. | Source: Tâm Vũ/The Standard

Another quarter, another record-high office vacancy rate in San Francisco. 

The latest preliminary data from commercial real estate firm CBRE showed the city’s struggling office market has again hit a dismal new low in the second quarter, clocking in at 37% vacancy, up slightly from 36.7% in the first quarter of 2024. The data solidifies SF’s unfortunate reign as the country’s leader for empty office space. 

Meanwhile, average asking rents continue to dip slightly and signs of a “Great Reset” in office real estate has led to investors buying up distressed properties, with several recent fire sales—including one building that changed hands at a stunning 90% discount from its 2016 price. 

Still, the CBRE report’s bigger-picture takeaways leaned towards the hopeful. 

“The supply level seems to have reached its peak, and we’re starting to see substantially increased demand from tenants, which tells us the market is really starting to stabilize,” Colin Yasukochi, executive director of CBRE’s Tech Insights Center, told The Standard in an interview. “It seems we’re in the early stages of a recovery.”

An overall recovery is still “many years into the future,” according to Yasukochi, but a growing number of bright spots indicate things hopefully won’t be getting worse for too much longer. 

“There might be small changes over the next couple quarters, but the effective peak is right now,” he said. “We don’t expect it to go up much more.” 

San Francisco’s highest vacancy mark—the peak peak before rates finally start to reverse—will likely land in the first quarter of 2025, according to Alexander Quinn, senior research director at real-estate firm JLL. 

“That’s our forecast, which is admittedly imperfect,” Quinn said, explaining that the prediction is based on an analysis of existing leases, expiring leases, renewal rates and expansions. “We estimate that it will peak in the first quarter, and then will start to retreat from there.” 

One driver is that companies are finally starting to come to grips with a sense of their own “new normal” for post-pandemic office attendance. “We’re reaching a stabilization point, where we expect that firms will start to understand what share of workers need to be in the office, what share do not, and how often,” Quinn said. 

Cushman & Wakefield pegs the peak—and its reversal—a bit earlier: 

“We’re forecasting that we’ll likely hit the peak by the end of the year, and then see a slow improvement in 2025,” said firm senior research director Robert Sammons. “We’re looking at a recovery beginning next year in a much more noticeable way.” 

CBRE’s Yasukochi said he expects the next handful of quarterly vacancy rate changes to amount to splitting hairs.

“Every tiny increment sets a new record, but the reality is, what’s most important is that tenants are feeling confident to sign leases and there’s an increase in demand in the marketplace,” he said. “That’s really the best indicator of where the market is headed, and not so much whether the vacancy is 37% or 37.1% or 36.8%.”

One sign of a stabilizing market? While the amount of office space that companies shed still slightly outpaced the amount that was newly occupied, the difference was the smallest since the second quarter of 2022, according to CBRE.  

Year-to-date leasing activity is 25% higher than the same period last year,  with 1.9 million square feet leased in the second quarter alone. According to CBRE, potential tenants are currently looking for 6.9 million square feet of office space, just short of 2019’s pre-pandemic average of 7 million. 

The locus of that demand has come from artificial intelligence-focused companies, said JLL’s Quinn. While many of these leases are smaller—coming from seed or Series A companies, who don’t yet need a lot of space—that industry is likely to keep expanding in the city, he said. Some particularly hot neighborhoods for AI, including the low-inventory Mission Bay area where OpenAI has planted roots, are likely to see vacancy rates in the 10 to 15% range over the next handful of quarters, he added. 

But it’s not just AI. Cushman & Wakefield’s Sammons said law firms, financial services, and other professional services companies are also scooping up space, a fact that bodes well for the overall office market. “It’s well-rounded—it’s a variety of tenants and industries taking space in the city once again,” he said. “To me, that’s one of the big positives right now.” 

Derek Daniels, regional research director at Colliers, said he’s paying close attention to drivers of office demand, including employment numbers and the amount of VC funding into local tech startups. 

But there’s also another driving force that makes it hard for him to pin an exact point for a turnaround.

“It’s a tricky year, with the election,” Daniels said. “It’s hard to call it.”