Leaders from various commercial real estate firms sat on a panel this week to discuss the future of the industry in San Francisco after 2024’s record-high office vacancy rate.
Office vacancy rates in San Francisco appear to be a long way from returning to pre-pandemic levels, the panel said.
Vacancy rates reached a peak of 37% in 2024, according to CBRE, a global commercial real estate investment firm.
“This seems like a much deeper hole that we’re in, so it’s going to be a longer crawl out,” said Chris Quiett, the head of real estate in the U.S. for Manova Partners, during the panel. Manova Partners is a global real estate investment firm.
Alexander Quinn, a researcher for the real estate management firm Jones Lang LaSalle, also known as JLL, kicked off the discussion with a presentation on the realities of San Francisco’s commercial real estate market in 2024 and predictions for this year.
From 2019 to 2024, office vacancy increased by 29% in San Francisco in part due to the shift to work-from-home in 2020 when shutdowns were implemented as the COVID-19 virus spread, according to JLL.
A once bustling downtown became deserted overnight, leaving office buildings empty.
Despite the pandemic being over, employees at some companies have not fully returned to the office five days a week, instead opting for a hybrid schedule. Twenty of the largest tech employers have significantly downsized the amount of office space they lease, according to CBRE.
Some areas in downtown San Francisco have been slower to recover than others.
Quinn pulled up a map of downtown that showed the different 2024 vacancy rates in the city based on geographic region.
The audience let out a gasp when they saw the 2024 fourth quarter vacancy rates in the areas of South of Market and Mid-Market, which were 45% and 47%, respectively.
Meanwhile, the Financial District and the North Waterfront had lower vacancy rates of 33% and 30%, respectively, according to JLL.
There is also “incredible variance” in price per square foot based on location, Quinn said.
“The Transamerica building is doing deals at $150 per square foot. On the other hand, you can go to Mid-Market and do a deal for $25 per square foot,” he said.
Can AI leases save the market?
After Quinn’s presentation on Tuesday, a panel of six members from different commercial real estate companies discussed navigating the future of the industry.
They debated on the extent to which AI companies signing leases could help save the city’s commercial real estate market.
In 2024, A.I. companies signed leases totaling to 1.2 million square feet. A significant portion of the leases signed by AI firms are located in the area of Mission Bay, according to JLL.
Despite the force that AI companies are bringing to the market, some panelists think that the vacancy rate is simply too high to be solved with AI companies alone.
“It’s not a single source solution,” said Jim Walker, senior vice president of commercial real estate firm Kidder Mathews.
“AI tenants are part of our leasing, but it’s not the main driver,” said Stephanie Kwong Ting, director of investments at real estate investment firm Swig Company. “I don’t think it’s going to save the day.”
Cyrus Sanandaji is the CEO and managing director of Presidio Bay Ventures, a real estate investment and development firm.
He thinks that AI companies could set the tone for other industries to start coming back into the office. AI companies tend to require in-person work, which he thinks can help start a trend that others could follow.
“AI has sort of promoted a return to office culture,” Sanandaji said. “They have established this in-person culture because of the pace of innovation and the fact that they have to be together to problem solve … Even if all it does is change the mindset of other occupiers, that alone is a massive benefit.”
Considering the potential for growth in the AI industry, some panelists predict that AI companies that already have leases in downtown San Francisco could add on more office space in the future.
“I think we’re going to see another million square feet of leasing activity in the AI space and AI is going to continue to roll,” Quinn said. “We’re seeing a lot of these companies continue to grow, so what we’re projecting this year is to see them add more square footage.”
“These 3,000 and 5,000 square foot users will become 15,000 or 20,000 square foot users in the next 12 to 18 months,” Walker said.
The conversation also focused on how new government administrations at both the national and local levels are expected to have an impact on the market.
Red flags as policies shift
Panelists expressed concerns about President Donald Trump’s plans to impose tariffs and an intense crackdown on immigration.
“We’ve got a change in government on the national level which is going to squeeze us on the immigration side,” said Greg Smithies, a partner at Fifth Wall, a venture capital firm that specializes in investing in real estate technology.
Trump’s promises to limit migration and impose mass deportations could lead to a shortage in manual labor jobs that commercial real estate companies depend on.
“We’re going to see a massive crunch in labor,” Smithies said.
Quinn predicted that unemployment could increase nationwide, especially in industries that are typically comprised of a high number of immigrant workers.
“We’re going to see unemployment increase in the construction sector, retail sector, and hospitality sector in the Bay Area,” Quinn said during his presentation. “It depends on some of the labor force questions that we’re all facing, but were expected.”
Tariffs could also pose a problem for the commercial real estate market since it could lead to a rise in material and construction costs of buildings.
“We’re going to see a massive crunch in labor.”
Greg Smithies, partner at Fifth Wall
“About 60% of lumber in California comes from Canada,” Smithies said. “So, if we have any embargoes going on, that’s not going to be very good for material prices. With this, it might actually be a five-year problem.”
Many speakers were optimistic about the new mayor, Daniel Lurie, being able to aid in boosting commercial occupancy in the Mid-Market and South of Market areas through incentives like tax credits.
“I think we all really feel better about the new administration with the new mayor,” Kwong Ting said. “Vacancy in the Mid-Market area won’t change without city involvement and a big master plan.”
Although there are many factors that could either help or harm San Francisco’s commercial real estate market, some panelists think that the only way to go is up.
“We’re optimistic,” Quiett said. “We think we’ve reached the bottom.”
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