Market Updates

San Francisco Market Report August 2023


As of the third quarter of 2023, the San Francisco apartment market shows signs of stability after the volatility of recent years. Vacancy has leveled off, albeit at a higher level than before the pandemic. Rent growth is generally flat, and construction activity has shifted from San Francisco to the peninsula. Investment activity is muted, reflecting broader economic headwinds. In the investment market, sales activity has slowed substantially over the past year, as the effects of interest rate increases and economic uncertainty dampened investor interest.


As of the third quarter of 2023, the apartment vacancy rate in San Francisco stands at 6.9% and has been holding steady around this level for the past 12 months. A multitude of factors, including population decline, remote working, and social problems related to homelessness and crime, have reduced demand across the metro area, with the largest impacts hitting neighborhoods in the heart of San Francisco. Overall, the apartment market continues to benefit from high single-family home and condo pricing, which creates a barrier to home ownership in the area. San Francisco’s homeownership rate ranks among the lowest in the country at under 40%, and future housing development is expected to be predominantly concentrated in apartment properties.


The volume of new apartment completions in San Francisco has slowed. As of 2023Q3, just 1,600 units delivered over the past year. This compares to the 5-year average of 2,300 units per year. However, the pace of new construction has picked up recently, and approximately 2,500 units are projected to be completed in calendar year 2023. Much of the current construction pipeline is located to the south of San Francisco. Spurred by growth in life sciences and biotechnology, new projects are clustered in Peninsula employment markets such as South San Francisco, San Mateo, and Redwood City, which have emerged as popular locations for transit-oriented development around Caltrain stations.


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The repricing of office assets in downtown San Francisco moved into gear in the second quarter as bids were accepted for two office buildings at notably low prices. Both were cases of owner-users getting rid of high-vacancy buildings that were no longer required. Looking ahead, vacancy is forecast to continue to increase as more tenants reduce their space needs as their leases expire. With no strong indications of a return to demand growth, rents are expected to continue moving downwards, with investment pricing adjusting accordingly.


The overall vacancy rate for the San Francisco Market increased to 19.6% in the third quarter and is forecast to rise further, having now passed the previous high point of 16% that occurred during the dotcom bust in 2002. With 12.7 million SF of sublease space available, the availability rate has increased to 24.9%, indicating that many tenants have already vacated spaces that will not be renewed. By comparison, the national availability rate currently stands at 16.6%. With negative net absorption for the past 12 months of -7.3 million SF, much of that newly available sublet space will likely become vacant as leases roll over. Beyond downtown San Francisco, the office market is in better health. Across the submarkets in San Mateo County and South San Francisco, the average vacancy rate is around 12% and a few larger leasing deals have closed. 


About 1.4 million SF of net new office space completed during the past 12 months. Major completions include two buildings comprising 421,000 SF in Kilroy’s Oyster Point development, both of which were preleased by Stripe, a payment processing platform. In San Francisco, Visa’s new headquarters, a 300,000 SF building at Mission Rock, is currently delivering. Overall, office construction activity remains subdued. 


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The investment market is showing signs of a sharp slowdown after two years of elevated activity. High-interest rates and investor caution have dampened demand and resulted in total sales volume of just $98 million so far in 2023. By comparison, annual sales volume peaked at $2.2 billion in early 2022.


We continue to see a slowdown in leasing activity in 2023Q3. Flex vacancy has increased by 6.6% in the past year and stands at 16.1% in the third quarter of 2023. By comparison, logistics space vacancy remains close to its long-term average at 4.9%. Overall market vacancy ticked up to its current rate of 8.7%. Availability in the flex sector has also increased and is currently 25.5%. This figure reflects both the availability of space in speculative projects under construction and an increase in sublet space. 


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 also taking shape in the southern part of Downtown San Francisco and several Peninsula employment centers, including Millbrae, San Carlos, Belmont, and Redwood City. New construction totals about 4.4 million SF underway. There are also conversion projects, typically involving older office, retail, or industrial buildings being redeveloped as flex space.


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In the investment market, transaction activity remains low amid the persistence of high-interest rates and recessionary challenges to consumer spending and operating performance. Financial distress related to imminent loan maturities is also a growing concern. Several retail properties have loan maturities within the next two years, with the largest being Stonestown Galleria, where a $165.5 million loan is scheduled to mature in 23Q3.


Notable retail centers in San Francisco have faced several closures. As a result, retail vacancy currently stands at 5.5%. We continue to see conversions of retail spaces to more valuable uses. In Union Square, the renovation of the old Macy’s Men’s Store at 100 Stockton St. involves most of the 243,000SF project being repositioned as office space, as evidenced by the 22Q4 commitment by co-working space provider Convene to take 65,000 SF. Another building that was previously part of Macy’s Union Square complex, at 233 Geary St., was sold for redevelopment in 2020. Plans for the site call for street-level retail, several floors of office space, and residential condominiums on the upper levels.


As of the third quarter, construction activity in San Francisco is at a historically low level. The construction pipeline consists of a small number of mixed-use redevelopment projects and a grocery store, with a total volume of 92,000 SF underway. The combination of a lack of developable sites and restrictive planning policies has limited the volume of new retail development in San Francisco. Renovation of existing properties is the most common source of new-to-market retail space. One such project is the renovation of the vacant six-by-six retail center located at 935-965 Market St., a half-block from Westfield’s San Francisco Center. Ikea’s Ingka Centres purchased this property for $198 million in 20Q3. The project is expected to be delivered before the end of 2023 and will include an Ikea store set to open this month.


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*Source: CoStar

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