Market Updates

San Francisco Market Report April 2023


San Francisco is in a period of transition. Social and economic changes brought about by hybrid working, the aftermath of the pandemic, and a cyclical economic slowdown, are impacting how and where people live. The owners and managers of apartment buildings in San Francisco are stewards of expensive and highly regulated multifamily buildings that cannot be easily or quickly changed and reconfigured to suit changing market demand. Developers and landlords are trying to figure out what these demand changes mean and how to respond to the evolving housing marketplace.


The vacancy rate in San Francisco currently stands at 7.5% and has been holding steady around this level for the past 12 months. While this is an improvement over the 2020 high of 10.9%, it remains above the pre-pandemic average of 5% to 6%. Annual net absorption, at 1,100 units, aligns with the metro’s long-term average.


The completion of new apartment units in San Francisco has slowed recently, with just 1,200 units delivered over the past year. This compares to the 5-year average of 2,200 units per year. However, new construction has picked up recently, and approximately 2,500 units are projected to be completed in the calendar year 2023.

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After several years of very strong growth in rents and other costs of doing business, several major employers were either planning or enacting relocations to less-expensive markets. Downtown availability, at 28%, suggests that as leases roll over, businesses are planning to downsize and consolidate their space. In San Mateo County, life science campuses and lab space are in high demand from biotech businesses, reflecting continued venture capital investment in both start-ups and established businesses.


Leasing conditions in San Francisco remain muted, reflecting post-pandemic return-to-office levels that are among the lowest in the nation and a collapse in demand for office space that has shrunk new leasing activity. Office vacancy levels shot up from around 7% in 2019 to 17.9% currently across the market and upward of 21% in the cluster of submarkets that constitute the downtown core.


The current low level of demand in the San Francisco office market has dampened new construction activity. Several approved developments have been delayed due to canceled commitments and unforeseen economic challenges stemming from the pandemic. Currently, most of the development projects are being undertaken in South San Francisco and San Mateo County in response to continued strong demand in the life sciences subsector.

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San Francisco’s industrial market is one of the smallest of all the major U.S. metros. The city’s original role as a major port declined many years ago and the once bustling wharves and warehousing districts have been repurposed, or are in the process of being redeveloped, for other uses.


In recent months, the market vacancy rate has increased again and currently stands at 7.3%. The flex space category is the cause of the recent rise in market vacancy, with new space coming online at the same time as a dip in demand. Biotech tenants are adjusting their leasing plans in the face of weaker economic conditions and a pullback in funding by investors. Other than the flex/R&D sector, San Francisco’s industrial market is more localized, and many tenants are in the area by necessity, to be very close to either their delivery points or a highly skilled employee base.


San Francisco’s industrial market is now undergoing something of a development boom, with approximately 5 million SF of space currently under construction. All this space—some 20 projects in total—is flex space that is primarily aimed at the robust life science/biotech R&D tenants and is a response to high levels of growth and occupier demand in this sector. The geographic focus for new flex space is the South San Francisco Submarket. However, new construction is disbursed throughout the metro area, with sizable projects taking shape in the southern part of Downtown San Francisco and several Peninsula employment centers, including Millbrae, San Carlos, Belmont, and Redwood City.

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A significant factor contributing to weak performance in the San Francisco retail market is the city’s population decline, which began several years ago in response to high costs of living and has been exacerbated by the pandemic. On the supply side, the market has a low amount of new construction, partly because of limited availability and restrictive planning policies, but also because of weak demand. Overall, with the continuation of weak demand growth and supply constraints, the outlook for retail is projected to remain muted.

In San Francisco, the retail vacancy rate increased in the post-pandemic period, and is now one of the nation’s highest, at 5.6%. Union Square’s historic position as the preeminent retail center in Northern California has deteriorated in recent years, with the closure of many important retailers, including department stores, designer boutiques, and mainstream chain stores. Over the longer term, the stock of shopping center space is falling as other uses become relatively more valuable.


The combination of a lack of developable sites and restrictive planning policies has limited the volume of new retail development in San Francisco. Historically, this has kept rents high and vacancies relatively low. Currently, the construction pipeline consists of a small number of redevelopment projects and a grocery store, with a total volume of 92,000 SF underway.

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*Source: CoStar

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