In a post鈥揅OVID hybrid work environment, cities with more than those that are primarily dominated by tech office jobs. San Francisco is the second-most homogenous downtown in the United States, with more than uses. By comparison, those uses occupy only 49% of downtown Manhattan. Because of the diversity of businesses and land uses, including housing, entertainment, and academic institutions in Manhattan鈥檚 high-density downtown areas, foot traffic is significantly higher there than in San Francisco, even though .
What does this comparison mean for downtown San Francisco鈥檚 recovery? Introducing housing, adding more culture and entertainment uses, and attracting institutional uses like universities and hospitals will make the city more resilient in the long term and drive new investment downtown at a crucial moment. One key way to diversify downtown San Francisco is to repurpose its functionally obsolete class B and C office buildings while preserving its role as the region鈥檚 densest employment center.
Doing so will ensure that commercial office tenants continue to be an important driver of the city and region鈥檚 economy and also will support small businesses, nightlife, and the arts by attracting people, especially in the evenings and weekends. In addition, the new uses will generate more municipal tax revenues than largely empty office buildings, allowing the city to continue providing essential services to residents, workers, and visitors.
What has happened to San Francisco鈥檚 office market?
San Francisco鈥檚 commercial office market went from the strongest in the country before the COVID-19 pandemic to the weakest, having the highest office vacancy rate in the nation.
Increase in Office Vacancy Since the Fourth Quarter of 2019, San Francisco Compared with Other Major U.S. Cities
Among the 14 largest U.S. office markets, San Francisco has gone from the strongest to the weakest. Click image to enlarge.
As of the third quarter of 2023, San Francisco鈥檚 office vacancy rate was 28.3%, its highest ever. At the peak of the Great Recession, in 2008, the city鈥檚 office vacancy rate was 17.7%. Right now, more than 30 million square feet (of a total inventory of 86 million square feet) are available to rent in San Francisco, representing an availability rate of 35%. As of September 2023, class B and C spaces have an availability rate of 37% (9 million of 25 million square feet).
Availability by Building Class
More than 30 million square feet of office space is now available to rent. The availability rate is higher for Class B and Class C buildings, which have more than 9 million square feet of space available.
| Office Building Class | Total Inventory | Total Available Space | Availability rate |
| Class A | 61,398,769 | 21,228,151 | 35% |
| Class B | 22,707,688 | 8,264,622 | 36% |
| Class C | 2,049,289 | 784,477 | 38% |
| Total | 86,155,746 | 30,277,250 | 35% |
Source: JLL, 2023
How is class B and C space faring?
In San Francisco, the amount of office space that was leased on average (average annual absorption) during the period from 2000 to 2019 was 500,000 square feet. From 2011 to 2019, the office market was robust, and the average annual absorption was 1.5 million square feet. However, the demand for class B and C space over that period was weak. From 2000 to 2019, the average annual absorption for class B and C office space was negative (-60,000 square feet per year), meaning that more space was vacated than leased. If we exclude the dot-com bust of 2000 to 2002, the average absorption of class B and C space from 2003 to 2019 was 180,000 square feet. Even in the peak office market period of 2011 to 2019, when the overall market averaged nearly 1.5 million square feet per year, class B and C absorption was negative in some periods. As new Class A office buildings were completed, tenants migrated from outdated class B and C spaces into these nicer spaces.
This pattern has persisted through the post-pandemic period. Across the country, there has been a , with the strongest tenant demand in premium buildings that have better amenities, such as high ceilings, views, wellness characteristics, access to outdoor space, and the most modern technology and mechanical systems. Best-in-class 鈥渢rophy鈥 office buildings have massively outperformed class B and C commodity office stock in San Francisco. The top 20 buildings have an availability rate of 19% compared with 35% for other buildings. The flight to quality trend is almost certain to persist as employers seek high-quality space to attract and retain employees and encourage them to spend time in the office.
Net effective rents are down between 20% (Class A buildings) and 40% (class B and C buildings). The combination of significantly higher vacancies, lower effective rents, and higher interest rates have resulted in buildings selling for about 20% to 33% of their pre-pandemic value.
Real estate company Cushman and Wakefield estimate that as much as 25% of all U.S. office space will be obsolete by 2030. In San Francisco, about 14 million square feet of class B and C space can be considered obsolete. This space is defined as class B and C buildings built before 1990 that had not been renovated in at least 30 years.
What will happen to office space over the next three to four years?
Many tenants have expiring leases over the next two to four years, and approximately 19.8 million additional square feet of Class A space (32% of the inventory) and another 7.1 million square feet of class B and C space (29% of inventory) will become available. While much of the Class A space will likely be taken up by new tenants, based on historical patterns, only half of the Class B and Class C space is likely to be re-tenanted.
Class A and Class B and C Space, Current Availability, Plus Expiring Leases as a Percent of Total Inventory
As leases expire, an additional 27 million square feet of space will become available by 2027. Click image to enlarge.