Market Updates

San Francisco Market Report February 2023


The San Francisco apartment market continues to make positive headway as the city slowly recovers from the pandemic-led drop in demand. In 2020, as young mobile tech workers fled the locked-down city in search of less expensive alternatives, almost 10,000 units were vacated and the vacancy rate increased to 11.3%, while market rents fell by 11%.Consequently, apartment vacancy has recovered only to 7.3% , and rents are still below 2019 levels.


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 7.3%, compared to a peak of 10.9% at the height of the pandemic. In 2020, the vacancy rate for high-end units reached nearly 20%. This has improved, however. The return of high-income renters has reduced 4 & 5 Star vacancy to 9.8%.


Due to the multi-year timeline needed to erect large apartment complexes in the city, deliveries have remained elevated, with about 7,400 market-rate apartment units delivered over the past three years, and approximately 8,300 units under construction. Spurred by growth in life sciences and biotechnology, most of the new construction is concentrated in Peninsula employment markets such as South San Francisco, San Mateo and Redwood City, which have emerged as popular locations for transit-oriented development.

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Office vacancy levels have shot up from around 7% in 2019 to 16.9% currently across the market and upward of 20% in the cluster of submarkets that constitute the downtown core. Downtown availability, at 27%, suggests that as leases roll over, businesses are planning to downsize and consolidate their space. Sublease space remains at record highs, and most plans for new construction are on hold.


The overall vacancy rate increased to 16.9% in 22Q4 and is forecast to rise further in 2023, having now passed the previous high point of 16% that occurred during the dotcom bust in 2002. The availability rate increased to 22.0%, indicating that many tenants have decided to not renew at lease expiration. Beyond downtown San Francisco, the office market is in much better health. Across the submarkets in San Mateo County and South San Francisco the average vacancy rate is 10.5% and positive 12-month net absorption of 580,000 SF.


A handful of large development projects in areas such as the SOMA submarket, which were approved before the pandemic, remain on hold. About 1.7 million SF of net new office space completed during the past 12 months. Major completions in 2022 include two buildings comprising 421,000 SF in Kilroy’s Oyster Point development, both of which were preleased by Stripe, a payment processing platform. There is presently 3.0 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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San Francisco has one of the smallest industrial real estate markets of all the major U.S. metros. A good proportion of the space under construction is preleased, and strong reported demand is expected to ensure that much of the speculative space is absorbed. Nevertheless, some upward movement in market vacancy is expected in 2023 as new projects deliver. Market rent growth has declined somewhat in 2022 but is expected to increase in 2023, reflecting the delivery of higher-rent properties in the market.


Net absorption in the market has registered in positive territory in four straight quarters and looks to maintain that trend. This is a strong bounce back from a multiyear negative run from 2019 into 2021. Net absorption swung positive in 21Q4, and new leasing activity surpassed 1 million SF in 21Q4 and 22Q1, before falling to 600,000 SF in 22Q2 and 400,000 SF in 22Q3. 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 6.1% throughout 2022. 


San Francisco’s industrial market is seeing a historically high level of industrial development, with approximately 4 million SF of space currently under construction. The geographic focus for new flex space is the South San Francisco Submarket. New biotech space, and really any new industrial or flex space with ample clear height and high power capacity, has been highly prized in a region where most inventory has aged and development has been limited. 

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San Francisco’s retail market did not fully share the benefits of the post-pandemic bounce in consumer spending that saw retail sales increase at stores across the nation, positive absorption of retail space, lower vacancy, and an uptick in rents. By contrast, in San Francisco, the retail vacancy rate, which was one of the lowest in the nation in 2019, increased in the post pandemic period. Similarly, average market rent, which increased at an annual rate of 3.7% nationally over the past 12 months, decreased by -3.8% in San Francisco.


Leasing activity in downtown San Francisco remains tepid. Even before the pandemic, in 2019, some high profile retailers, including Barneys New York and Forever 21, closed their downtown locations. The market’s largest mall — Stonestown Galleria — has also faced the loss of major anchor stores, with both Macy’s and Nordstrom closing in recent years. The mall pivoted to replace these tenants with Target, Whole Foods, and Sports Basement, and also launched an ambitious redevelopment project to add density through the addition of 3,000 homes.


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. 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.

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*Source: CoStar

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