As San Francisco emerges from pandemic restrictions, renters are returning nearly as quickly as they left. While likely below where it would have been had the pandemic not occurred, the total number of occupied apartment units is now above pre-pandemic levels. The trailing 12- month absorption for market-rate apartments sits at 3,200 units, compared to a low point of -6,800 units since the onset of the pandemic. The trajectory of the market in the short term will largely depend on how many San Francisco residents choose not to return and how quickly the draws of a large city can attract newcomers coming out of the pandemic.
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 11.3% as renters left the expensive city during COVID shutdowns. Some young professionals who had relocated to the region for jobs moved back home, while suburban, outdoor-friendly, and cheaper areas enticed city dwellers who were able to work remotely.
Mid-level assets typically perform relatively well in San Francisco. In normal times, there is no shortage of demand for moderately priced options in the expensive market, but job losses and relocations to other cities negatively affected all segments of the market in the downturn. Vacancy among 3 Star assets currently registers near the market average at 7.7%, while 1 & 2 Star vacancy experienced a slightly milder rise in 2020 and prevails at 6.0%.
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 7,500 market-rate apartment units have been delivered over the past three years, and approximately 7,800 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, and office vacancy levels have shot up from around 7% in 2019 to 16.2% currently across the market and upward of 19% in the cluster of submarkets that constitute the downtown core.
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 16.2% in 22Q3 and is forecast to rise further in 2023, passing the previous high point of 16% that occurred during the dotcom 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 last 12 months of -4.1 million SF, much of that newly available space will become vacant as leases roll over. After falling in early 2022, sublet space increased to 11.2 million SF and is now approaching the level seen during the height of the pandemic.
About 1.5 million SF of net new office space was 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. In San Francisco, Brookfield Properties completed construction of 415 Natoma St. in late 2021. The 654,000-SF tower was completed 100% vacant and has since leased just 20,000 SF to Thumbtack. In San Mateo, Roblox committed to taking all the space in two buildings in the Bay Meadows mixed-use project. The first, a 219,000- SF building, was completed in 22Q3. The second 214,000- SF building is under construction and will be completed in the middle of 2023. There is presently 3.7 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 declining since the midpoint of 21Q2 after increasing for several years. 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. The roughly 1.2 million SF that was vacated on net in 2020 compares to tenant losses of more than 2 million SF in 2009 and 2010, respectively, amid the global financial crisis.
Net absorption in the market has registered in positive territory for 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. That compares to the average vacancy across the country of 4.0%.
New biotech campuses have boosted market supply over the past few years, but the demolition of obsolete industrial space had 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 5.6 million SF under construction.
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San Francisco has not shared in the post-pandemic retail recovery that saw positive absorption, lower vacancy, and an uptick in rents across most of the United States. By contrast, in San Francisco, the vacancy rate, which was one of the lowest in the nation at 3% in 2019, has continued to increase in the post-pandemic period and is currently 5.5%. Similarly, average market rent, which increased at an average annual rate of 4.3% nationally, decreased by -4.1% in San Francisco.
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%.
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 88,000 SF, are currently under construction. Renovation of existing properties is the most common source of new-to-market retail space.
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