Market Updates

San Francisco Market Report January 2023


While the national apartment market improved rapidly in 2021, recovery in San Francisco has been slower. The city has the lowest return to office metrics in the nation, suggesting that many tech workers decided to make their exit from San Francisco permanent. 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 2,600 units, compared to a low point of -6,800 units at the height of the pandemic. Looking ahead, positive absorption is projected for the metro market, but the rate of improvement in areas close to downtown San Francisco will depend upon both a return to in-office work and improvements to safety and security. 


San Francisco’s apartment vacancy rate has come down from an all-time high of 20Q4. The rate now sits at 7.7%, compared to a peak of 11.2% as renters left the expensive city during the COVID shutdowns. New supply, while not excessive, will keep vacancy elevated above its long-term level. Roughly 7,700 units are currently under construction across the metro. Developers have added over 2,400 units to the market annually over the past five years, on average.


A construction boom hit San Francisco in the 2010s expansion cycle, and there are many projects working their way through the pipeline. Due to the multiyear timeline needed to erect large apartment complexes in the city, deliveries will remain elevated over the next several years. San Francisco’s recent development cycle peaked in 2016 and 2017 in terms of deliveries. But the pipeline has remained active. About 7,800 market-rate apartment units have been delivered over the past three years, and approximately 7,700 are under construction.

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San Francisco, with its tech-heavy workforce, has the lowest return-to-office metrics of any major market in the nation. The ease with which technology workers adapted to working from home, and the almost seamless transition to remote working with a distributed workforce by technology companies, was unexpected and transformational.


The overall vacancy rate increased to 16.8% in 22Q4 and is forecast to rise further in 2023. With negative net absorption for the past 12 months of -5.3 million SF, much of that newly available space will become vacant as leases roll over. 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. The stronger performance in these submarkets reflects a higher representation of suburban office properties catering to the booming life science industry. There is also a trend for technology companies relocating from downtown San Francisco.


Weakness in the San Francisco office market has reduced the pipeline of new construction projects. 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. There is presently 2.6 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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Industrial vacancy in San Francisco has been generally flat in 2022. After increasing for several years, the vacancy rate peaked in 21Q2 but has since declined to its current rate of 6.5%. Biotech tenants have taken occupancy of recently completed buildings, driving positive net absorption. In addition, San Francisco’s older stock of traditional industrial buildings has recently seen a rebound in tenant demand after incurring significant occupancy losses during the pandemic.


Net absorption in the market has registered in positive territory in three 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 leasing activity has picked up. 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. Robust new leasing should help to keep the market vacancy rate within its current range. 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. 


New biotech campuses have boosted market supply over the past few years, but the demolition of obsolete industrial space has outpaced development over the past two decades. Prior to 2019, supply levels had declined for 10 consecutive years. San Francisco saw an approximately 9% total inventory reduction from 2000 through 2018 but finally received substantial development additions recently, which have been well received. Currently, the development pipeline is robust, with more than 5.0 million SF under construction.

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The hybrid/work-from-home trend has reduced San Francisco’s daytime population and curtailed the spending that these workers bring into the city. San Francisco’s return-to-office metric is one of the lowest in the nation, at less than 40% of pre-pandemic levels, according to some estimates. The impact on retail and restaurant trade, especially in the Financial District and Union Square submarkets, has been significant.


Leasing activity in downtown San Francisco remains tepid. The combination of continued economic uncertainty and social problems in the downtown area is causing some tenants to choose not to renew their leases. Overall, the amount of shopping center space is set to decline as other uses become relatively more valuable. This is most notable in San Francisco’s Union Square, where the Westfield San Francisco Center announced plans to reconfigure the upper levels of Nordstrom from retail to office space.


Ground-up retail development in San Francisco has been historically constrained by the limited availability of space and restrictive planning policies and will remain difficult going forward due to limited site development opportunities. Only a handful of properties, primarily renovation projects, totaling approximately 92,000 SF, are currently under construction.

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*Source: CoStar

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