The San Francisco apartment market underwent an unprecedented downturn during the pandemic, as the young mobile workforce fled the locked-down city in search of less expensive alternatives. Apartment vacancy has declined only to 7.7% heading into 2023, and rents are still below 2019 levels. However, rents remain the highest in the nation. The trailing 12- month absorption for market-rate apartments sits at 2,500 units, compared to a low point of -6,800 units since the onset of the pandemic. Looking ahead, positive absorption is projected for the San Francisco multifamily market.
While still above the market’s historical average, San Francisco’s apartment vacancy rate has come down from the all-time high of 20Q4. The rate now sits at 7.7%, compared to a peak of 11.3% as renters left the expensive city during the COVID shutdowns. While the recent positive momentum is encouraging, remote working has created uncertainty about how quickly a full recovery can transpire.
About 7,400 market-rate apartment units have been delivered over the past three years, and approximately 8,300 are under construction. Geographically, development has been concentrated in the city’s southern submarkets, including South of Market and Mission Bay/China Basin/Potrero Hill. Residents can more quickly access freeways and Caltrain, which provides transportation to major employment hubs in the Peninsula, Silicon Valley, and San Jose from these areas.
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The COVID-19 pandemic triggered an exodus of companies, employees, residents, and visitors away from downtown San Francisco. The resulting fall in economic activity continues to exert a negative impact on the viability and value of office properties and supporting businesses both in the downtown area and the wider metropolitan region. By contrast, the life science office market continues to perform well. Located south of the city of San Francisco 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.
The overall vacancy rate increased to 16.4% in 22Q4 and is forecast to rise further in 2023, having now passed the previous high point of 16% that occurred during the dot-com bust in 2002. The availability rate increased to 21.4%, indicating that many tenants have decided to not renew at lease expiration. With negative net absorption for the past 12 months of -4.5 million SF, much of that newly available space will become vacant as leases roll over.
Both current deliveries and new construction starts are focused on continued strong demand in the life science subsector, which is for the most part in South San Francisco and San Mateo County. A handful of large development projects in areas such as the SOMA submarket, which were approved before the pandemic, remain on hold. There is presently 3.4 million SF of office space under construction in the market. The largest individual project is the 300,000-SF Building G at Mission Rock, which will become the new headquarters for Visa on completion in 2023.
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Demand for San Francisco’s relatively small-sized industrial market has been generated by last-mile logistics tenants, tech firms absorbing flex space, and biotech firms taking lab space. Structural factors such as a lack of available industrially zoned land, weak infrastructure, and confined port capacity limit the market’s distribution facility potential. Industrial vacancy in San Francisco has been declining since the midpoint of 21Q2 after increasing for several years. Biotech tenants have taken occupancy of recently completed buildings, driving positive net absorption.
Vacancy in San Francisco’s industrial market reached a pandemic-era peak of 7.3% in 21Q2, but the vacancy rate has remained flat at its current level of 6.0% throughout 2022. That compares to the average vacancy across the country of 3.9%. New development has been rare in San Francisco in recent years, and any new construction has typically been biotech or R&D space. In addition, those spaces generally are leased out quickly, highlighting strong demand for high-quality space in the market.
Currently, the development pipeline is robust, with more than 5.1 million SF under construction. Geographically, the majority of industrial space recently developed and currently under construction in the metro is concentrated in South San Francisco and Brisbane and consists largely of flex R&D projects geared toward biotech tenants.
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The pandemic triggered an exodus from San Francisco, particularly among young tech workers, reducing demand for retail goods and services. Between February 2020 and June 2022, over 42,000 people left the San Francisco market’s labor force. Heading into 2023, the workforce is again growing but has further to go before it attains pre-pandemic levels.
Overall, absorption was marginally positive over the last 12 months, led by the mall sector. However, the vacancy rate, which was one of the lowest in the nation at 3% in 2019, continued to increase in the post-pandemic period and is currently 5.5%.
Unlike many markets, San Francisco is not overbuilt with shopping centers, and vacant spaces have historically been taken by retailers looking to expand or enter the market. However, the amount of shopping center space is set to decline as other uses become relatively more valuable. For instance, in downtown San Francisco, the Westfield Center announced plans to reconfigure its upper levels from retail to office. The downturn in the office market may affect this strategy, but other uses, such as residential or hospitality, may provide alternatives.
Only a handful of properties, primarily renovation projects, totaling approximately 88,000 SF, are currently under construction. Redevelopment of brownfield sites is a further source of new retail space; however, these projects tend to focus on other uses, such as apartments and offices, with a smaller component of ancillary retail. For example, the Gateway at Millbrae Station is a large mixed-use project that includes residences, affordable housing, offices, and a hotel, together with 44,000 SF of street-level retail.
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