San Francisco, known globally for its tech-driven economy and the iconic Golden Gate, is no stranger to market fluctuations. And its office market, a prime indicator of economic vitality, has been the topic of many discussions, especially in the post-pandemic era. As work-from-home models continue to reign, concerns around the future of office spaces rose. However, recent data indicates that San Francisco’s office market is bouncing back. But the surge in interest isn’t coming from who many would expect. A report by Globe Street highlighted a surge in office tours by over ten percent in the last quarter, marking a positive shift in market dynamics. With the city being a tech hub, it was widely expected that AI-based companies would be at the forefront of this re-emergence. Contrary to these expectations, the resurgence in interest doesn’t trace back to AI tenants.
Surprisingly, traditional businesses and non-profits are leading the charge. This unexpected shift can be attributed to a few factors:
1. Dropping Rental Rates: One of the key attractions for these traditional entities is the falling rental rates. San Francisco, notorious for its exorbitant prices, has seen a dramatic decrease in office rental rates, especially in the Central Financial District. This drop is an inviting prospect for many businesses that are looking to secure prime office space without burning a hole in their pockets.
2. Locking in Lower Rates: Another driving factor is the opportunity to lock in these favorable rates for extended periods. With uncertainty looming in the global economic landscape, businesses are aiming for stability. Long-term leases at reduced rates ensure that organizations can benefit from the current market conditions for years to come.
3. Flexible Landlords: Landlords, recognizing the shifts in the market and keen on filling vacant spaces, are showing increased flexibility. They’re willing to offer longer leases and negotiate favorable terms, making it even more attractive for businesses and non-profits to secure spaces.
It’s particularly interesting to note the shift in focus from the South of Market area, traditionally a hotspot for startups and tech companies, to the Central Financial District. The latter, being the backbone of San Francisco’s economic landscape, has seen some of the steepest rental rate drops. This has, in turn, attracted a diverse pool of tenant’s keen on leveraging the price advantage.
This is not the first boom and bust cycle that has seen traditional businesses begin an office recovery. During the boom-and-bust dot.com market in 2001, the same thing occurred. Rents had reached over $100 a foot with tech tenants bringing the then vacancy rate to under two percent in 2000. 18 months later the vacancy hit over 25 percent with rates dropping into the twenties and thirties. With no tech tenants to be found, landlords conceded their high rental rates and made deal with whoever they could and whatever terms they could secure. Traditional tenants and nonprofits immediately entered the market offer taking more space than they needed to secure their own potential long-term growth needs and 18 months after rents crashed the next recovery was under way.
While tech and AI firms remain pivotal to San Francisco’s economic fabric, it’s the traditional businesses and non-profits that are currently driving the office market’s revival. As the market continues to evolve, it will be interesting to see how these dynamics shape the city’s commercial landscape in the years to come.
Written by: Hans Hansson
Hans Hansson is the President of Starboard Commercial Real Estate. Hans has been an active broker for over 35 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email [email protected] or call him at (415) 765-6897.
