Downtown San Francisco is at a turning point. Commercial real estate crashed during the pandemic, and more than a third of the city’s offices remain empty. But analysts say vacancies have peaked and should begin to rebound.
The change comes as some major tech companies abandon their hybrid experiments and ask workers to show up full time. AI companies are booming too, and they act more like dot-com startups — younger vibes, in-person culture — than legacy big tech, with its middle management and older employees who might have moved away during the pandemic.
Adding to this brew, the Federal Reserve just cut interest rates for the first time since March 2020, and by a half-point — an amount larger than expected by some measures. Making money cheaper to borrow won’t blast open redevelopment flood gates, but it’s a positive step for property owners waiting for better financials to transform old downtown buildings.
“It’s the start of a positive trend,” said Colin Yasukochi, executive director of CBRE’s Tech Insights Center. “Most people believe the worst is behind us. That may take many years to play out but at least we’re on that path.”
San Francisco might not have years to wait. Empty office buildings mean fewer people downtown, which has spiraled into all kinds of economic woes — and ultimately, less tax revenue for the city.
Despite the gloomy fiscal situation, officials have boosted spending on homelessness, crime, and other problems. This summer, City Hall approved a record budget of $15.9 billion. But if a downtown revival doesn’t start filling coffers fast, officials will have to backtrack on promised services and programs with midyear cuts, similar to what Mayor London Breed ordered in December.
Come back (no choice)
Unlike previous years, many commercial real estate numbers are heading in a positive direction — except this one: office vacancies ticked up ever so slightly from 36.8 percent to 36.9 percent in the third quarter, according to CBRE. However, the research firm expects increased demand to reduce vacancies in 2025.
Real estate firm Colliers also says more prospective tenants are touring properties, and rents have stabilized from quarter to quarter. The number of leases signed so far this year exceeded the first three quarters of every year since 2019, according to Colliers.
Among major occupants trying to refill offices, SF’s largest private employer is leading the charge. Salesforce required its workers to return four days a week starting this month. A spokesperson wouldn’t comment on numbers, but the company had more than 11,000 San Francisco workers in early 2023, according to the SF Business Times. (The company later announced a 10 percent cut across its workforce.)
Data from card reader company Kastle show San Francisco office traffic rose more than 2 percent, from 39.4 to 41.7 percent, coinciding with Salesforce’s return-to-work mandate. Nearby businesses seemed to benefit immediately.
“Return to office helps downtown retail, there’s no question,” said Santino DeRose, managing broker at local commercial real estate firm Maven.
DeRose says food and beverage companies are notable among his recent Financial District leases, including a restaurant group into 220 California and Red Bay Coffee into 220 Montgomery. “We’re going in the right direction, but we still have a ways to go on the economy and interest rates,” DeRose says.
(Mayoral candidates Mark Farrell and Asha Safaí are also calling for city workers to go back to the office full-time. They won’t fill up private office space, but they will help ailing cafes, pharmacies, and other shops in and around Civic Center.)
AI is so hot and SF is the headquarters. It’s the dot-com boom all over again.
Karen Chapple, director of the University of Toronto’s school of cities
Amazon, with several offices in San Francisco, has also asked workers to come back to the office five days a week beginning January 2025. There are “thousands of corporate employees in the Bay Area,” according to a spokesperson, but he would not give a specific figure for San Francisco.
The spokesperson forwarded a company memo that acknowledged employees might need time to adjust: “We recognize there will occasionally be days when someone might need the flexibility to work from home for the day, and for those occasions, employees should communicate with their manager – just as they would have prior to the pandemic.”
AI and in-person
A new generation of companies could be coming too. About 20 percent of new leases signed in 2024 so far — meaning that they weren’t renewed leases — have been signed by AI tenants, according to Colliers research. AI startups are moving into office spaces of all sizes, too, and the big companies are mushrooming out. OpenAI, which raised $6.6 billion in September, expanded with 315,000 square feet waterfront at Mission Bay last month – the equivalent of filling about 20 percent of the 61-story Salesforce Tower.
OpenAI also signed the city’s largest real estate leases in 2023, for a cumulative 1 million square feet in SF. Its rival Anthropic leased around 230,000 square feet in the Financial District this year. And this month, Elon Musk’s startup xAI moved into OpenAI’s old building at 3180 18th Street in the Mission.
AI workers are showing up largely in person. “AI is so hot and SF is the headquarters. It’s the dot-com boom all over again,” said Karen Chapple, director of the University of Toronto’s School of Cities.
Lower interest rates could rev up venture capital and hasten a return of the VC-backed startup scene that has historically ebbed and flowed in SF. “That has been a major segment of growth in space demand in San Francisco for the past 20 plus years,” says Colliers’ regional research director Derek Daniels.
But young, fun, and in-person has a counterweight, and it could stall SF’s recovery. The big tech firms that dominate downtown commercial space cultivate a different employee structure that includes middle managers, often older and with families, who don’t want to live in urban centers, Chapple said.
The bigger firms have also been more accommodating to remote schedules, and culturally, it’s different than say, Texas, which reopened much sooner during the pandemic. That’s reflected in San Francisco’s return to office rate, said CBRE’s Yasukochi.
Apple, Meta, Google, and Uber now require three days a week in the office, and enforcement has also remained sporadic. “That dynamic remains and is not going to bring back San Francisco,” Chapple said.
Jackhammer faster
During boom times, property owners secured loans at relatively low interest rates. But when interest rates shot up during the pandemic, costs to refinance expiring loans became a challenge, especially if property owners were booking less revenue from office leases. An estimated $2.8 trillion worth of loans across the country will come due between this year and 2028, according to research firm Trepp.
Some owners have been forced to sell at bargain basement prices or forfeit investments. The former Airbnb headquarters at 255 California Street went for $301 a square foot — a 65 percent discount from its 2019 sale, according to CBRE.
Another Financial District example is the 750,000-square-foot Market Center, a two-building luxury complex at 555-557 Market, once home to Standard Oil and Chevron. Its current owner the Paramount Group has written the property’s value down to zero, according to the San Francisco Business Times, as high-profile clients have fled. The Business Times also reported that Paramount is looking for a buyer before its giant loan comes due.
One obstacle to bringing tenants back is age — of buildings, that is, not the tenants. SF had a building boom in the 1980s, and those buildings are now old and undesirable, says University of Toronto’s Chapple.
Their owners are debating whether to renovate, but interest rates need to drop more to convince owners to embark on huge projects. “The cost to build and finance it is still too high right now,” said CBRE’s Yasukochi. (The same problem applies to proposed conversions of office buildings to housing.)
Reviving downtown public spaces — with free concerts, Oktoberfest, night markets, and the like — has been helping, says Julie Taylor, executive vice president at Colliers. Renovation is good too, like the Powell Street makeover in progress, with one caveat. They have to move fast, says Taylor: “No one wants to lease with jackhammering going on.”