Multifamily
In the second quarter of 2024, the San Francisco multifamily market continues to see improved operating performance. A return to population growth and an improving economy will likely initiate an uptick in renter demand. With low levels of new construction, the prospects for rent growth in the year ahead are much improved from 3% to 4%. Better market conditions may also cause new developments to break ground in the coming quarters.
Vacancy
The apartment vacancy rate in San Francisco stands at 6.4%, a slight decline from the previous quarter. This is the lowest vacancy rate since the first quarter of 2020 and is a continuation of a trend of positive net absorption that has been a characteristic of the market’s slow recovery following the pandemic.
Over the longer term, the apartment market in San Francisco benefits from high single-family home and condo pricing and elevated mortgage rates. This creates a barrier to homeownership in the area and supports a relatively strong demand for rentals.
Construction
While construction starts have picked up in the past six months, total construction activity remains subdued compared to the pre-pandemic decade. At the end of Q2, just 2,200 units were delivered over the past year. This compares to the five-year average of 2,200 units per year and is one of the lowest annual totals since 2012. However, the elevated pace of new construction starts is projected to lead to a rise in completions in both 2024 and 2025.
There are 2,800 units currently underway, which is just a little off the five-year average of 4,400 units. The under construction stock measures 1.5% of existing inventory, well below the average rate of 4.0% across the nation. Most market-rate units under construction are in 4 & 5 Star buildings.
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Office
At the end of 2024, a recent improvement in leasing conditions is providing optimism that the worst may be over for San Francisco’s office market. Leasing volume in the past six months was the highest since early 2022. Expansion by tech companies, particularly in the AI sector, has led to an uptick in new space requirements and leasing activity. Moreover, the pace of downsizing and lease exits by existing tenants has abated somewhat from the record pace of such activity in 2023. Occupiers continue to adjust their leased spaces to reflect hybrid working patterns, but it appears that most tenants who plan to downsize have already done so.
Leasing
San Francisco has enjoyed an improvement in leasing conditions over recent months. In the second half of 2023, local brokers reported an increase in the amount of space tenants were looking for in the market, and this was supported by anecdotal evidence of a few large space requirements by tech firms.
The uptick in interest has since led to a rise in leasing activity. Several AI and other tech companies across San Francisco have expanded into sublet spaces. The largest were OpenAI, which sublet 486,000 SF from Uber in Mission Bay, and Anthropic, which took 230,000 SF from Slack at 500 Howard St. in the South Financial District. As a result, leasing volume in the past six months has reached its highest level in two years, and net absorption, which had been negative by more than -2 million SF in each of the previous three quarters, was barely negative in the first quarter of 2024.
Construction
Office construction activity in San Francisco remains subdued, with developers reluctant to commence projects while demand for existing spaces remains weak. Most development projects that are currently underway target the life science subsector, focusing mainly on San Mateo County. For example, the Elco Yards project in Redwood City is a mixed-use development that includes approximately 500,000 SF of life sciences office space in four individual buildings. Other life science projects include the Alexandria Center for Life Sciences in Millbrae and Lane Partners’ Southline project in South San Francisco.
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Industrial
In the second quarter of 2024, the San Francisco industrial market is seeing a continuation of the trends that characterized the past year, with low levels of leasing, vacancy rising, and moderate rent growth. However, the two leading industrial market segments are on different tracks. The flex market has been weakened by falling demand and historically high levels of new supply, while the logistics segment has remained tighter.
Leasing
The slowdown in leasing activity that began more than a year ago is still shaping activity in the third quarter of 2024. At 3.2 million SF, total industrial leasing volume in 2023 was the lowest since the Great Recession. The leasing slowdown has come about as higher interest rates and economic uncertainty reduced demand for industrial space. Flex vacancy increased by 7.4% in the past year and stands at 21.0% in the third quarter. By comparison, logistics space vacancy remains close to its long-term average at 7.7%. Overall market vacancy ticked up to its current rate of 12.0%.
Construction
Most of the 4.6 million SF of flex space currently under construction is speculative, and around 75% of that total is available. Moreover, the vacancy rate in flex buildings completed since 2022 sits at around 50% as of the second quarter of 2024. In the build to suit segment, new buildings were completed in South San Francisco in the past year for Graphite Bio and Genentech. Speculative deliveries account for a majority of the new space.
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Retail
At the end of 2024, the overall performance of San Francisco’s retail sector continues to be held back by weakness in the core parts of downtown San Francisco, in particular Union Square and the adjacent neighborhoods.
If combined with more tourists and employment growth, the return of population growth should provide the basis for positive movement regarding occupancy and rents in the quarters ahead. However, a larger recovery will likely need more time.
Leasing
San Francisco continues to see growing vacancy, with local centers and suburban locations faring better than downtown. Much of San Francisco is characterized by freestanding retailing along popular urban strips in heavily populated neighborhoods that comprise eclectic mixes of eateries and independent boutiques. In contrast to the current situation in downtown and Union Square, these retail zones are generally active and vibrant, with a healthy influx of new stores and restaurants.
The Union Square narrative took a more positive turn recently with the opening of a small-format Ikea store at 945 Market St. The Ikea store is part of a larger project that includes a gourmet food hall and an Industrious coworking facility. Another positive point for downtown is the continued presence of a critical mass of high-end fashion retailers, centered on Grant Street and Post Street. These designer boutiques have maintained, and in some cases expanded, their presence in recent years despite the drop in overseas tourism, which provides a large share of their income.
Construction
Construction activity in San Francisco is at a historically low level. The construction pipeline consists of a small number of mixed-use redevelopment projects and a single Safeway store, with a total volume of 160,000 SF underway. This compares to the five-year average of 360,000 SF.
Redevelopment of brownfield sites is an additional source of new retail space; however, these projects tend to focus on other uses with a smaller ancillary retail component. For example, the Gateway at Millbrae Station is a large mixed-use project that includes residences, affordable housing, offices, a hotel, and 44,000 SF of street-level retail. Leasing of the retail units is progressing, with new leases recently announced for Chick-fil-A, Crumbl Cookies, and Panda Express.
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*Source: CoStar
