Multifamily
At the end of Q3 2024, the San Francisco multifamily market continues to see growing demand. After several years of outward migration, the population of San Francisco has stabilized in the past year, with a modest increase projected for 2024. This has been a key factor in the improved demand picture. However, the bulk of demand growth is now focused on San Mateo County.
Vacancy
The apartment vacancy rate in San Francisco stands at 6.3%, a slight decline from the previous quarter. This is the lowest vacancy rate since the first quarter of 2020. Among the submarkets with the highest vacancy rates are those with the greatest exodus of tech workers during the pandemic and those with the worst street level social problems. These neighborhoods include parts of Downtown San Francisco, Haight-Ashbury/Castro/Noe Valley, and Civic Center/Tenderloin. Demand remains subdued in these neighborhoods.
In contrast, submarkets in San Mateo County have seen higher rates of net absorption in the past year. Moreover, demand in and around downtown San Francisco will likely remain muted compared to pre-pandemic levels.
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 the third quarter, just 2,200 units were delivered over the past year. This is in line with the five-year average of 2,200 units per year. The elevated pace of new construction starts is projected to increase completions in 2025 and 2026.
There are 2,600 units currently underway, which is below the five-year average of 4,200 units. The under-construction stock measures 1.4% of existing inventory, well below the average rate of 3.5% across the nation. Most market-rate units under construction are in 4- & 5-Star buildings.
Want to get a deeper look into the San Francisco Multifamily Market? Download the full Market Report here.
View Our Multifamily Properties Here.
Office
At the end of the third quarter of 2024, a recent improvement in leasing conditions provides 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 most tenants who plan to downsize have already done so.
Leasing
Leasing conditions in San Francisco’s office market have improved in 2024. Following record levels of negative net absorption in 2023, the past few quarters have seen an increase in the amount of space leased and a decrease in the number of existing tenants moving out.
The increase in leasing dates to the second half of 2023, when local brokers reported an increase in the amount of space tenants sought in the market. Anecdotal evidence of a few large space requirements by tech firms supported this. The rapid growth of investment in AI has been the main driver of the uptick in leasing. Several AI companies across San Francisco have expanded into sublet spaces.
Construction
Amid the rapid increase in vacancy in the past four years, construction activity has dropped close to the low points of the Dotcom bust and the Great Recession. Of the handful of active office construction projects, almost all are aimed at the life science market. Even within this segment, construction has slowed sharply as developers hold off from breaking ground due to oversupply and weak demand.
Just 1.5 million SF of office space is currently underway in San Francisco. This is a sharp decline from the highly active construction market in the five years leading up to the COVID-19 pandemic when the amount of space underway ranged from 6 to 10 million SF.
Want to get a deeper look into the San Francisco Office Market? Download the full Market Report here.
View Our Office Properties Here.
Industrial
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 two years ago is still shaping activity at the end of the third quarter of 2024. At 2 million SF, total industrial leasing volume in the 12 months ending June 2024 was the lowest since the Great Recession.
The leasing slowdown has resulted from higher interest rates and economic uncertainty reducing demand for industrial space. Moreover, biotech companies’ demand for R&D space has diminished as venture capital funding dried up. This coincides with a spike in the delivery of newly constructed flex R&D space, which has resulted in a sharp increase in vacancies for that segment of the industrial market.
Construction
San Francisco’s industrial market is seeing a historically high level of development, with around 2.0 million SF delivered in the past year and 4.1 million SF of space currently under construction. These projects are all flex buildings that are predominantly aimed at providing R&D space for the life science/biotech industry. This sector has seen high levels of growth and occupier demand in recent years. However, in the past 18 months, tenants have reigned in their expansion plans after interest rate hikes curbed funding for biotech businesses.
The geographic focus for new flex space is South San Francisco. However, new construction is dispersed throughout the metro area, with sizable projects also taking shape in the southern part of Downtown San Francisco and several Peninsula employment centers, including Millbrae, San Carlos, Belmont, and Redwood City.
Want to get a deeper look into the San Francisco Industrial Market? Download the full Market Report here.
View Our Industrial Properties Here.
Retail
San Francisco’s retail market continues a year-long trend of weaker demand, as evidenced by low leasing volume, negative absorption, rising vacancy, and falling rents. The downturn in demand is almost wholly localized in downtown San Francisco, which has seen widespread store closures in response to significant declines in vibrancy and vitality. Foot traffic from daytime office workers, residents, and visitors fell significantly during and after the COVID-19 pandemic. Additional well publicized problems related to crime, homelessness, and drug use also plague many parts of downtown San Francisco, keeping shoppers away.
Leasing
Demand for retail space remains subdued at the end of the third quarter of 2024. While new leasing volume is below the historical average, the larger problem is that more space is being vacated as tenants move out than is being leased to new tenants.
As of the end of the third quarter, annual net absorption in San Francisco was negative by -750,000 SF. The entirety of this negative absorption was due to store closures in downtown, an area comprising just 25% of the San Francisco market. The largest single decline in occupancy was at the Emporium Centre, formerly the Westfield San Francisco Centre, which had -350k SF of negative net absorption as Nordstrom and several major chain retailers exited
Construction
At the end of the third quarter of 2024, construction of new retail properties in San Francisco is minimal. The only new stores that are currently underway are located at street level as part of mixed-use redevelopment projects.
Several unfavorable supply and demand trends have dampened retail construction activity. For many years, a lack of developable sites and restrictive planning policies limited new retail development. More recently, the shift to non-store retailing and population decline has reduced demand and diminished the viability of new retail projects. Moreover, in the past year, the persistence of high interest rates has raised the cost of construction financing, thereby presenting an additional challenge to the feasibility of retail developments.
Want to get a deeper look into the San Francisco Retail Market? Download the full Market Report here.
View Our Retail Properties Here.
*Source: CoStar
