Market Updates

San Francisco Market Report June 2023


As of the second quarter of 2023, the San Francisco apartment market is showing signs of stability after the volatility of recent years. Vacancy has leveled off, albeit at a higher level than pre-pandemic. Rent growth is generally flat, and construction activity has shifted from the city of San Francisco to the Peninsula. Investment activity is muted, reflecting broader economic headwinds.


As of the second quarter of 2023, the apartment vacancy rate in San Francisco stands at 7.2% and has been holding steady around this level for the past 12 months. Annual net absorption, at 1,300 units, is below the metro area’s 10-year annual average of 2,000 units. 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.


As of 2023Q2, just 1,500 units were 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 calendar year 2023. In total, there are 4,500 units underway. 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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Vacancy levels remain high at 18.6% across the market. New construction, while almost non-existent in downtown San Francisco, is underway in South San Francisco and the Peninsula. Over 2.5 million SF is under construction, primarily in the life science sector, which continues to perform well. Located south of the city of San Francisco in San Mateo County, life science campuses and lab space have seen high demand from biotech businesses, although economic headwinds have slowed demand sharply in 2023. Unlike life science, the weakness in the market for traditional office space has stifled investment activity. Both buyers and sellers remain cautious. Many assets are underwater on their mortgages, which may lead to an uptick in foreclosures and distressed sales in the coming quarters.


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. 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 net absorption is positive. The stronger performance in these submarkets reflects a higher representation of lab space in Peninsula office properties catering to the booming biotech industry and tech companies that have been established for much longer than those that took large leases in downtown San Francisco during the pre-pandemic years.


The current low level of demand in the San Francisco office market has dampened new construction activity. The development projects that are currently proceeding are mostly responding to strong demand in the life science subsector, focused mainly in South San Francisco and San Mateo County. In San Francisco, a handful of large development projects in areas such as the SoMA submarket, which were approved before the pandemic, remain on hold. Several approved developments have been delayed due to canceled commitments and unforeseen economic challenges stemming from the pandemic. 

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As of June 2023, the inventory of flex space in the San Francisco industrial market is expected to grow quickly, while the inventory of logistics space is expected to shrink tamely. 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 $25 million so far in 2023. By comparison, annual sales volume peaked at $2.2 billion in early 2022.


Flex vacancy has increased by 3.0% in the past year and stands at 12.4% in the second quarter of 2023. By comparison, logistics space vacancy remains close to its long-term average at 4.4%. Overall market vacancy ticked up to its current rate of 7.2%. In the logistics sector, operators face ongoing challenges from high operating costs and labor shortages. Nevertheless, logistics and distribution companies are continually looking for opportunities to improve their delivery networks. Continued economic uncertainty and deliveries of speculative flex space in the months ahead may cause the vacancy rate to rise further in the coming quarters.


In the San Francisco industrial market, there is over 4 million SF of space currently under construction. These projects are all R&D flex space that is aimed at the life science and biotech industries that have seen high levels of growth and occupier demand. 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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San Francisco’s retail market is falling behind with a vacancy rate of 5.5%. 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. Moreover, the persistence of high-interest rates in the second half of 2023 will likely see falling investment sales volume and pricing in the quarters ahead.


As of the second quarter of 2023, the San Francisco Retail Market is characterized by growing vacancy and flat rents, with suburban locations continuing to fare better than downtown. Notable shopping centers such as Union Square and Stonestown Galleria have faced major losses with the closures of major anchor stores and other retailers.  Elsewhere in San Francisco, other retailers, including Walgreens and Starbucks, have cited rising crime as a reason for shuttering downtown stores. Shopping center space is being looked to be converted to other uses including office and mixed-use spaces.


As of 2023Q2, the construction pipeline consists of a small number of 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. Historically, this has kept rents high and vacancies relatively low. However, waning demand in the retail sector over the past several years suggests that lack of growth in the future will not just be because of constrained supply. Renovation of existing properties is the most common source of new-to-market retail space. 

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*Source: CoStar

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