San Francisco Offices Are Getting Emptier

The exodus from San Francisco offices is gathering pace as businesses vacated nearly 2 million square feet of office space in the past three months, adding to the city's problem with vacant buildings.

According to the latest data from commercial real estate firm CBRE, published in July, San Francisco closed the second quarter of 2023 with a record overall office vacancy rate of 31.6 percent, as the city struggles to rebound from the COVID-19 pandemic.

That's more than 35 million square feet of office space that's sitting empty in the city, according to NBC Bay Area, which said more than half of the office space in the Yerba Buena district was empty at the end of June.

CBRE said a net 1.83 million square feet of office space was vacated by occupants in the second quarter, increasing the city's office vacancy rate by more than two percentage points from 29.4 percent in the first quarter. So far this year, a net 3.4 million square feet of office space has fallen vacant.

The health emergency had seen an outflow of workers from the city, who relocated to cheaper, smaller towns in the outskirts of the City by the Bay, and started working remotely.

Even after the end of the pandemic, many workers have chosen not to return to their offices—or to the city. This has left many buildings in San Francisco partially or mostly empty, harming retail and causing a fracture in the city and the way it used to work, as San Francisco-based Moody's Analytics economist Lu Chen told Newsweek.

"If we look at the city as a whole, you have retail, offices, and residential all supporting each other. Now there's actually a broken network among different linkages of commercial properties," Chen said.

The city has seen a well-publicized wave of retail closures, with AT&T recently announcing it will join a long list of companies that have shut down their flagship stores there.

Before the pandemic, the office vacancy rate was around 4 percent, CBRE's Tech Insight Center executive director Colin Yasukochi told CBS last month. Newsweek has contacted CBRE for comment by email on Tuesday.

The high office vacancy rate in the city is harming San Francisco's economy "beyond its impact on commercial real estate itself," Ted Egan, San Francisco's chief economist, told Newsweek.

"It is contributing to a loss of business tax revenue to the city, and a loss of ridership for local transit agencies. It has also harmed small businesses located downtown, who don't have the same foot traffic from office workers eating lunch, meeting after work, or shopping during the day. It is also curtailing business tourism."

The districts that have been hit the hardest by businesses leaving and have the most empty office space, as reported by CBRE and NBC, are Yerba Buena (with a 54.5 percent vacancy rate), the South of Market (with a 42.5 percent vacancy rate), and South of Market West (with a 38 percent vacancy rate).

Other districts are still struggling but much less than these three, with North Waterfront/Jackson Square reporting a 30.8 percent vacancy rate, the Civic Center/Van Ness a 29.9 percent vacancy rate, Potrero Hill a 29.5 percent vacancy rate), Union Square a 29.2 percent vacancy rate, and the Financial District a 29 percent vacancy rate.

The South Financial District and the Mission Bay/China Basin areas are doing the best, with respectively a 27.4 and a 28.6 percent of vacancy rate.

"As companies evaluate their office space needs, many are deciding to reduce their footprints to better accommodate hybrid work and cut costs," Yasukochi told Newsweek.

"They often make these decisions as their leases expire; however, some decide earlier and offer sublease space to other tenants. While there are companies growing their business and office space needs, artificial intelligence firms for example, they are being outpaced by reductions," he added.

Yasukochi told NBC that office vacancy rates are growing everywhere in the Bay Area, but the phenomenon is happening at a faster rate in San Francisco.

"But we are starting to see some signs that a peak in the total amount of vacant space on the market is getting much closer. We are starting to see some growth come back into the market where tenants are out there looking for space. One of the areas that we are seeing an uptick in demand is from artificial intelligence companies, which is a very hot area in tech right now," he said.

"We expect vacancy to further climb in the next several quarters until the economic outlook improves in 2024. On the bright side, we've seen tenant demand increase in the last six months, signaling more activity for next year," he told Newsweek.

UPDATE, 7/14/23 4:50 a.m. ET: This article was updated with a comment from Colin Yasukochi.