San Francisco’s commercial real estate sector is grappling with unprecedented challenges as office vacancy rates soar to record highs. With the vacancy rate reaching 37% in 2024, according to CBRE, industry leaders are voicing concerns about the future during recent panel discussions. The combination of the pandemic's impact on work culture and significant downsizing by major tech corporations has left many downtown office spaces empty and businesses scrambling to adapt.
This week, leaders from various commercial real estate firms sat on a panel to dissect the turbulent state of the market. Chris Quiett, head of real estate for the U.S. at Manova Partners, commented on the situation: “This seems like a much more substantial hole we’re in, so it’s going to be a longer crawl out.” The shift to remote and hybrid work—initiated during the pandemic—has fundamentally changed how companies interact with physical office space.
Explaining the current conditions, Alexander Quinn, from Jones Lang LaSalle (JLL), noted the steep rise in vacancy rates from 2019 to 2024 linked to employees working from home. “When shutdowns were mandated due to COVID-19, many office buildings became deserted overnight,” he stated. This shift has not reversed significantly, even as many companies have moved past the pandemic phase.
Research by JLL shows alarming vacancy rates, with areas such as South of Market and Mid-Market suffering rates of 45% and 47%, respectively, during the fourth quarter of 2024. Comparatively, the Financial District and North Waterfront experienced relatively lower vacancy rates of 33% and 30%. The discrepancies raise questions about the future of different neighborhoods within the city, with concerns about long-term consequences for businesses relying on dense office populations.
Panelists have begun exploring whether the rise of artificial intelligence (AI) companies could provide relief to the beleaguered commercial real estate market. Interestingly, AI companies signed 1.2 million square feet of leases in 2024, according to JLL. Many of these leases are concentrated around the Mission Bay area. While some experts anticipate growth from AI firms, others believe relying solely on these companies might not restore San Francisco's office occupancy to healthy levels. Jim Walker from Kidder Mathews argued, “It’s not going to save the day,” indicating the need for broader solutions.
Cyrus Sanandaji, CEO of Presidio Bay Ventures, expressed cautious optimism, stating AI companies may influence other sectors by promoting more employees to return to office settings. “AI has promoted this return to office culture because the pace of innovation necessitates collaboration,” he explained. The potential for growth within the AI sector remains promising, with projections indicating companies may expand their leased office spaces by substantial amounts within the next 12 to 18 months.
Despite these prospects, uncertainties loom, particularly with imminent political shifts. Concerns arising from President Donald Trump’s proposed tariffs and immigration restrictions have the potential to disrupt labor availability and market conditions. Partner at Fifth Wall, Greg Smithies, forewarned: “We’ve got new government changes nationally which will squeeze us on the immigration side.” He hinted at potential labor crunches, especially within sectors dependent on immigrant workers.
Quinn also predicted potential unemployment increases across key sectors like construction and hospitality, should immigration controls tighten significantly. “Certain industries typically comprise high numbers of immigrant workers, so the repercussions could be dire if current policies remain intact,” he noted during the event.
Panelists expressed cautious optimism about the new local administration led by Mayor Daniel Lurie. His proposed incentives, including tax credits, aim to revitalize commercial occupancy, particularly within struggling market areas. “The new administration brings hope for meaningful involvement to address the vacancy issues,” Stephanie Kwong Ting, of Swig Company, remarked. Yet, participants point out recovery will depend on coordinated actions aimed at reverse the downward trend.
A larger trend impacting the economic climate involves corporate policies shifting toward more stringent requirements for employees to return to the office—something echoed by major employers like Salesforce and Amazon, alongside federal directives from the Trump administration. This raises questions about whether such mandates can positively impact the local economy.
Reflecting on the broader circumstances, Nicholas Bloom, Stanford’s William Eberle Professor of Economics, detailed how the remote working trends have been acute due to San Francisco’s high density of tech and finance roles—making remote work relatively easy. He stated, “San Francisco was significantly impacted by the technological slowdown and hybrid models” as both external and internal challenges mounted, which makes the road to recovery markedly complex.
Even amid these challenges, there’s hope for San Francisco’s economy. Analysts maintain the overall economic fundamentals remain positive—pointing to the city’s exceptional weather and educational infrastructure as key assets. With various solutions being discussed and real estate leaders advocating for change, San Francisco's commercial real estate could find a path forward.
The industry’s resilience will be tested as it navigates these tumultuous waters, grappling with the dual pressures of market volatility and shifting political landscapes. Observers await to see whether the tech sector's resurgence, particularly through AI, could signal the tides turning for office spaces still grappling with vacancy woes.
Nonetheless, the broader economic framework, labor market uncertainties, and long-term commitments to remote work policies from major corporations indicate San Francisco’s commercial real estate market will face substantial hurdles before reclaiming its pre-pandemic vitality.