Market Updates

San Francisco Market Report March 2023


The San Francisco apartment market continues to make positive headway as the city slowly recovers from the pandemic-led drop in demand. 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. Consequently,apartment vacancy has recovered only to 7.4%, and rents are still below 2019 levels. Pricing has recovered somewhat, however, and the market cap rate remains one of the lowest in the nation.


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 7.4%,compared to a peak of 10.9% at the height of the pandemic. Performance is likely to remain muted compared to pre-pandemic levels as the adoption of remote and hybrid working becomes a permanent shift rather than a temporary phenomenon. Such a change has a direct impact on the demand for apartments in downtown San Francisco, where proximity to the workplace is a prime attraction.


Due to the multi-year timeline needed to erect large apartment complexes in the city, deliveries

have remained elevated, with about 7,200 market-rate apartment units delivered over the past three years, and approximately 8,900 units under construction.The largest project in the development pipeline is the Treasure Island/Yerba Buena Island Development Project, which will create a new neighborhood of around 8,000 homes. The project has recently started construction and is expected to begin delivering multifamily units in 2024.

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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 adapt 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 17.2% in 23Q1and is forecast to rise further, having now passed the previous high point of 16% that occurred during the dotcom bust in 2002. 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 around 10% and net absorption is positive. The stronger performance in these submarkets reflects a higher representation of lab space in suburban office properties catering to the booming life science industry.


The development projects that are proceeding are mostly responding to continued strong demand in the life science subsector, focused mainly in South SanFrancisco 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.

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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 registered in positive territory in four straight quarters in 2022 but may turn negative in the coming quarters as rising interest rates and economic uncertainty slow leasing activity. Vacancy reached a pandemic-era peak of 7.3% in 21q2 Before reducing to around 6% in 2022. In recent months,the market vacancy rate has increased again and currently stands at 7.1%. That compares to the average vacancy across the country at 4.4%.


San Francisco’s industrial market is seeing a historically high level of industrial development, with over 4 million SF of space currently under construction. These projects are all R&D flex space that is aimed at the life sciences and biotech industries that have seen high levels of growth and occupier demand. The construction pipeline is even larger when projects classified as office labspace are considered.

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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 3.6%nationally over the past 12 months, decreased by -4.5% in San Francisco.


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. Nearby, the renovation of the old Macy’s Men’s Store at 100 Stockton Street will involve most of the 243,000-SF project being positioned as office space, as evidenced by the 22Q4 commitment by coworking space provider Convene to take 65,000 SF.


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. 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 fromWestfield’s San Francisco Center. Ikea’s Ingka Centres purchased this property for $198 million in 20Q3.

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*Source: CoStar

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