What's Happening in the San Francisco Office Market?

In the American real estate industry, there's an adage that goes along the lines of "putting time in the market is better than timing the market." This expression applies to both residential and commercial investors; it essentially acknowledges the boom-and-bust cyclical nature of the market while promoting long-term strategies. For the bustling San Francisco office market, the boom cycle has been winding down since before the COVID-19 pandemic, but certain indicators suggest that it may start peaking again in 2025.

According to commercial real estate data provided by Cushman & Wakefield and compiled by analytics firm Switch on Business, 29 million square feet of office space in San Francisco has been vacant since the summer of 2024. At current market valuations, this represents a little over $2 billion of space that should be generating income. If we extend the analysis to the rest of the Bay Area, the situation represents more than $5 billion of unrealized rent.

The City by the Bay is not the only regional market feeling the office vacancy blues. At least 10 other metropolitan areas have $1 billion worth of office space without tenants. New York City stands out because some projections suggest that vacancy rates could rise past 30% by 2026. As dismal as things seem in San Francisco now, they are widely expected to improve with a boom cycle that many analysts think is already underway.

OpenAI, the artificial intelligence giant behind ChatGPT, fired the first salvo of the recovery by leasing 315,000 square feet of office space for its Mission Bay in September 2024. Scale AI, an OpenAI competitor, followed suit by leasing 180,000 square feet just north of the Design District, in a building previously occupied by Airbnb. Then you have companies such as Amazon and Salesforce, which have been calling employees back to the office and expanding their office spaces in San Francisco since 2023.

A full recovery of the San Francisco office space market is expected by real estate analytics firm VTS by the end of 2025, with an expansion projected for 2026. VTS publishes an Office Demand Index report that is forecasting double and triple-digit annual growth in the major technology hubs of Boston, Seattle, and San Francisco. It is important to note that the San Francisco forecast is contingent upon two specific tech industry scenarios: one considers continuous growth of AI, and the other bets on the expansion of the X ( formerly Twitter) social network, now that CEO Elon Musk has been appointed to lead an advisory committee for the federal government.

San Francisco became the heart of Silicon Valley during the Dot-Com Bubble of the late 1990s. Even after Wall Street was thoroughly shaken by the market correction that brought the Nasdaq 100 down to 1,114 points from a record-high 5,048 points, the technology sector continued to expand across San Francisco until the global financial crisis in 2008. Then, the tech industry enjoyed a major expansion that peaked from 2012 to late 2019. By the time the World Health Organization declared the coronavirus pandemic in the first quarter of 2020, the writing was on the wall to mark the end of the boom cycle for San Francisco office leasing.

The research methodology of the VTS Office Demand Index (VODI) tracks the number of visits and premise tours of prospective tenants. This involves real-time monitoring of tenant behavior along with square footage requirements. For comparison purposes, VODI looks at market activity in January 2018, which is considered a peak month for San Francisco office space. For the most part, VODI should be treated as an early indicator, which means that the execution of lease contracts may lag by a few months.

Everything that made San Francisco the new heart of Silicon Valley, a title once held by the region between San Jose and Palo Alto, is still in place and ready to thrive again. The tech industry is enjoying another renaissance beyond AI; we now have social networks, including X, vying to become a "super-app" like WeChat in China. There's also the electric vehicle revolution to consider, and new e-commerce models are emerging. Venture capital firms in the Bay Area are not going anywhere because they know that innovative tech companies will invariably want to be at the epicenter of the next digital revolution. The mandates to return to the office will likely continue for a few more quarters until hybrid work models are firmly established.

With all the above in mind, the San Francisco office market may not be looking so attractive in late 2024, but all the ingredients for a positive market rebound are certainly there. Despite some economic uncertainties and evolving work models, the underlying fundamentals of the Bay Area's tech industry suggest a strong recovery is feasible from now until 2026.