San Francisco’s Office Construction Trends in 2024: A Sector Rebounding Amid High Vacancy Rates
San Francisco’s office construction sector has experienced a remarkable resurgence as 2024 progressed, transitioning from a slow start to becoming one of the most vibrant markets in the United States. According to data from CommercialEdge, this uptick has been primarily driven by developments in the life sciences sector, positioning San Francisco to lead nationally despite ongoing challenges in the market.
Accelerated Construction Activity
As of November, 3.8 million square feet of office space was under development across 20 properties in San Francisco, accounting for 2.3% of the city’s existing office stock—double the national average of 0.8%. This positions San Francisco as the second-largest pipeline for office construction in the nation, following Boston, which boasts 3.6% of its stock under construction.
Leading these developments, Kilroy Realty’s Kilroy Oyster Point project will add 865,000 square feet through its three new buildings. Construction commenced in 2022 and has a revised delivery timeline set for the end of 2025. Similarly, IQHQ’s Spur Phase One, a 326,000-square-foot life science facility, is anticipated to complete by early 2025, having already topped out and financed through a robust $275 million loan.
Market Sales Activity and Trends
While the construction sector has gained momentum, the sales market in San Francisco remained relatively quiet throughout 2024, mirroring the subdued activity observed in 2023. The city emerged as the priciest office market in the U.S., with an average sale price per square foot of approximately $384, surpassing even Manhattan’s $379. Year-to-date sales totaled $747 million, with around 29 properties changing hands, demonstrating a significant downturn compared to the previous year’s figures.
One notable transaction was the acquisition of Sand Hill Commons, a two-building office campus, for $222.2 million. This purchase was made by Norges Bank Investment Management and illustrates the ongoing interest in high-value properties within the region, especially in light of a broader trend of rising office vacancies.
High Vacancy Rates and Conversion Initiatives
As of November, the vacancy rate in San Francisco’s office market reached a staggering 27.7%, significantly higher than the national rate of 19.4%. High vacancy levels have prompted discussions about adaptive reuse, specifically the conversion of vacant office spaces into residential properties. CommercialEdge’s newly launched Conversion Feasibility Index (CFI) identifies 112 Tier I properties in San Francisco, totaling 11 million square feet, as potentially suitable for such transformations.
This shift is exemplified by the ongoing conversion of the historic Humboldt Bank Building into a residential community, a project expected to invest $70 million in creating 124 new housing units.
Flex Office Space on the Rise
The coworking market in San Francisco remains robust, encompassing 3.7 million square feet as of November, outpacing other major U.S. cities like Miami and Seattle. Flex space constitutes 2.2% of the total office space in San Francisco, exceeding the national average. WeWork remains the predominant provider in the area, with significant competitors following closely.
This shift towards flexible working arrangements reflects broader changes in the way companies utilize space in the wake of the pandemic, reinforcing the ongoing evolution of commercial real estate in the metropolitan area.
Conclusion
The combination of robust construction activities, fluctuating sales dynamics, high vacancy rates, and adaptability in the form of office-to-residential conversions paints a complex picture for San Francisco’s office market as it continues to evolve in 2024. As developers pivot towards life sciences and flexible workspaces, the effectiveness of these strategies in mitigating vacancy challenges will be crucial moving forward.
