San Francisco Office Market: Signs of Recovery Amidst Challenges

In the wake of the COVID-19 pandemic, many urban office markets in the United States faced significant challenges, with San Francisco emerging as a notable example. The city grappled with substantial business relocations, particularly within the tech sector, as companies like X, Uber, and Lyft shrank their physical presence or exited altogether.

Initial Struggles and Prognostications

This exodus sparked concerns over a potential “doom loop,” where diminishing business activity could lead to declining city revenues and services, further driving companies away. However, recent data indicates a potential turnaround for San Francisco’s office market.

Positive Trends in Office Absorption

According to a report by Cushman & Wakefield, the fourth quarter of last year marked a significant development, with office space absorption in San Francisco turning positive for the first time since 2019. Specifically, the city saw an addition of nearly 118,000 square feet in leased office space during this period. In contrast, the fourth quarter of 2023 registered a net absorption of -2.7 million square feet, highlighting the shift in market dynamics.

Growing Leasing Activity

The brokerage noted in its Q4 2024 report that the increased leasing activity—totaling 7.7 million square feet last year—represented the highest levels since 2020, suggesting a recovery trajectory for the office sector.

Investor Confidence and Market Liquidity

Influential players in the real estate industry are taking notice of these positive developments. Angela Biggs, head of Americas real estate at Grosvenor, remarked on the uptick in Union Square leasing as indicative of a strengthening market. Additionally, recent data from CBRE showed that San Francisco was the second most attractive destination for real estate capital in the latter half of 2024, attracting $1.6 billion—an increase above the five-year average.

The improving liquidity in the market is underscored by MSCI data, which raised San Francisco’s capital liquidity score from 66.4 in 2023 to 68.1. This score—measured on a scale from 0 to 100—reflects the likelihood of achieving favorable pricing when selling assets, a positive signal for investors.

Increasing Lending Activity

Further demonstrating the market’s resilience, Trepp reported a rise in office commercial mortgage-backed securities (CMBS) originations to $5.9 billion last year, up from $1.6 billion in 2023. Notably, there have been no new CMBS delinquencies reported for the current quarter, with the overall delinquency rate year-to-date at 6.83 percent—lower than the average of 9.11 percent among the top 25 metropolitan areas. Trepp advises a cautious but optimistic outlook for the city’s office market.

Institutional Investment Confidence

Demonstrating a strong commitment to the San Francisco office market, Norges Bank Investment Management acquired a 50.1 percent stake in an office portfolio that includes two San Francisco properties in December. This move reflects confidence from a key institutional investor in the potential for market recovery.

A Nationwide Reflection

The recovery of San Francisco’s office market is emblematic of broader trends seen across the United States. JLL data reveals that, in Q4 2024, the national office market experienced its first quarter of positive absorption since 2021, signaling a potential rebound.

Challenges Ahead

Despite these encouraging trends, challenges persist. The shift to remote and hybrid work models has transformed demand for office spaces, resulting in elevated vacancy rates within San Francisco. While liquidity has improved, the city still lags behind prominent markets such as New York, London, and Berlin.

Conclusion: A Shifting Narrative

However, the indicators suggest that San Francisco is moving away from being merely a symbol of urban decline. Increasing confidence among market managers and investors, coupled with favorable trends, paints a picture of potential recovery rather than a persistent doom loop. As conditions improve, the city could well become a beacon of revitalization in the commercial real estate landscape across the United States.