San Francisco Office Vacancy Hits New Record High

USA – While the office property sector of San Francisco is beginning to rebound from the doldrums caused by the COVID-19 pandemic, data from property consultancy Avison Young shows that the office vacancy level in the city has exceeded the former peak during the Global Financial Crisis, according to a recent report from GlobeSt.

In Q4 2021, the office vacancy rate in the city hit 19.1 percent, up from the prior peak of 15.5 percent in 2009, and higher than the historical average of 10.1 percent.

The vacancy level indicates sluggish office rental activity. Although there was some recovery in leasing demand in 2021, which rose over 40 percent as compared with 2020’s figure, leasing activity remains 41 percent below the pre-COVID levels.

Avison Young noted that there’s “no modern precedent” for this significant drop in leasing activity.

In addition, overall office absorption last year reached -4.8 million square feet, which accounted for 5.5 percent of the present stock, and this level also exceeded the negative absorption seen during the Global Financial Crisis when the figure hit 2.3 percent of the office supply then. Nonetheless, office absorption has rebounded by 14.3 percent from 2020.

According to Avison Young, the high office vacancy level, coupled with the significant sublease stock, which hovers at 32.1 percent of the total supply, could lead to a huge drop in office rents.

The property consultancy explained that, historically, when the ratio of sublease space to vacancy level hits 26 percent, office rents also fall by double digits. At present, the ratio stands at 23.8 percent and office rents have just declined by 1.9 percent from 2019 and 4.1 percent from 2020.

Nevertheless, optimism returned to San Francisco’s office property market during the second half of 2021, during which office leasing volume surpassed 1 million sq ft for the second straight quarter since the onset of the pandemic.