Six months ago, developer Michael SHVO said after spending nearly $1 billion on Transamerica Pyramid, perhaps the most visible trophy office building in San Francisco’s struggling office real estate market, it was “struggling to deliver results.” Ta”. June wall street journal profile Chronicling his adventures in luxury commercial real estate, he struggles to go against market trends, and as relations with Shubo’s development partners sour, the half-buried pyramid attracts large private equity and insurance tenants. I pointed out what I was losing. Markets where total available space exceeds 35%.
That was then. After reopening the 48-story tower in September to unveil a $250 million renovation, Shubo announced in December that his long-term bet had been vindicated, with 85. % occupancy and an area of 185,000 square feet.
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“Suddenly, there’s a huge boom in the San Francisco office market,” he said of San Francisco’s office market. “Considering we haven’t had any leasing activity for four years, that’s what’s happening. We’re obviously very happy now.”
San Francisco has experienced a change in atmosphere. According to Shuvo, it’s due to mood changes. A more business-friendly next mayor And with the incoming president, there was a sense that real estate had finally hit rock bottom. Phil Mobley, national director of office analysis at CoStar Group, said San Francisco’s office market has declined more rapidly than other cities, and the public perception that San Francisco is rife with crime, drugs and homeless encampments. As a result, prices have reached distressed levels, he said. But lower valuations have led to a recent surge in leasing activity, which he characterized as “improving, but not healthy.”
There are many signs of this new activity, even amidst a challenging overall market. Stabilization is something to celebrate. is widely advertised JLL report It found that since November, the vacancy rate has shrunk for the first time in years, changing almost imperceptibly from 34.5 percent to 34.3 percent. Starting rents for leases signed in 2024 rose 4% compared to 2023, according to December VTS data. Additionally, with no new office projects scheduled for 2025, demand may outstrip supply.
Everything is moving in the right direction in terms of market demand and physical office presence. said max sireVice President of Investment Research VTS. Even the average leased area, which fell 30 percent to 10,000 square feet from 2020 to 2022, has now edged back to 12,000 square feet, a sign of further funding and growth.
The new technology industry that has long driven San Francisco’s office leasing business is leading the way.. Over the past year, the industry has added 3.1 million square feet of demand, including a 315,000-square-foot sublease in September by Open AI at 550 Terry A. Francois Boulevard, the former Naval Headquarters. Signed a large rental agreement.
While the city still has a ways to go (Saia said office leasing activity is only about half of what it was before the pandemic), there is momentum in the recovery. Colin Yasukochi Executive director of CBRE’s Tech Insights Center predicts 2025 will be the best year for San Francisco’s office market since 2019, with increased leasing activity and declining vacancy rates.
The biggest variable is the city’s downtown area, where businesses still account for 80% of the city’s GDP. While crime and homelessness remain pervasive problems, many business leaders believe that fortunes have changed with the recent election of business executive and political novice Daniel Lurie as mayor. His victory in November energized the financial and investment community, many of which backed him.
The Bay Area’s high-tech economy means any changes in the sector will ripple through the real estate market. This is exemplified by the much more severe decline of the city’s downtown compared to comparable cities. But it also means new trends and tenants will establish themselves here more quickly. A quarter of new rental activity from 2023 onwards will come from artificial intelligence, and 80% of the increase in demand for high-tech office space could come from growing AI companies, according to VTS data. Of the city’s 72 AI leases signed by early December of this year, 40 are in new markets and the first outside of incubators and co-working spaces, he said. JLL (JLL) Research Director Alexander Quinn. Last year, there were a total of 35 people.
The scale of technology leasing is also expanding. Companies in the market are looking for an average of about 32,000 square feet, with AI companies in particular looking for 43,000 square feet. start Sierra AIIn July, for example, Apple signed a lease for 41,000 square feet at 235 Second Street, the same building that houses Apple.
With the rapid growth of technology, especially AI and crypto companies, looks ready to benefit From the next Trump administration. Such policy support has the potential to further revitalize the office rental industry. Add to that pent-up demand, a return-to-office push by tech giants like Amazon, and new hiring next year. Yasukochi predicts further leasing activity.
He said it is also important not to overlook the small start-ups that dominate the technology ecosystem. Cyrus Sanandaj, Founder and Managing Principal of Owner Presidio Bay; like venture capitalists and technology accelerators. Y combinator He said the company is promoting Bay Area-based businesses, with clusters of startups located in Jackson Park, Mission Bay and North Park.
““Most founders, and the majority of investors we talk to today, want full-time presence in the office,” he said. “It’s an office-first environment and mindset.”
Technology and technology-adjacent industries are also driving the polarization of office activities. Professional services firms, from law firms to investment groups, are paying a premium to buy suitable buildings, and “no one is holding back,” he said. Sanandaji. Instead, they are signing 10-year leases to lock in today’s bargains. Companies with the budget and workforce will seek trophy offices, while the fluid market for startups requires bargain space to launch new companies.
San Francisco’s vast Class B office middle ground – too expensive for bargains, too cheap for luxuries – remains a problem. KoStar’s Mobley believes the market remains fundamentally unbalanced. Much of the extra office space will need to be demolished or renovated before vacancies are significantly reduced. Meanwhile, A-plus and trophy office space remains coveted and competitive. just like new york.
Recent years have also seen significant spending, investment, and promotion of the city’s new approach to downtown, championed in particular by Advance SF, which collaborated with urbanist Richard Florida to develop the city’s We helped draft a blueprint to revitalize the downtown area. Wade Rose, president of the advocacy group, said: The highlight of the plan Efforts to give workers, residents and tourists a reason to come downtown in the first place are beginning to bear fruit. A similar idea can be found in the Transamerica Pyramid. Transamerica Pyramid now boasts an improved park and gathering space thanks to Shubo’s investment.
“There is no question that the ripple effect of our work and success is felt throughout the neighborhood,” Shubo said. Just down the block, his own addition to 545 Sansome Street, a 52,000-square-foot development, and the related California revival of the 412,000-square-foot 530 Sansome, both due in 2026. Construction is scheduled for completion. The latter would be the first new commercial high-rise proposed. This is a bespoke project aimed at capturing the demand for trophy offices in the city from 2021.
Rose said Lurie’s selection was timely “with the city still in recovery mode” and said he understands “what it takes to get us back on our feet.” . After taking the oath of office on January 8th, Lurie’s plan A focus on streamlining the city’s bureaucracy and reducing project permitting times. He also pledged to create a Downtown Development Authority, create a development tracking agency and eliminate red tape for building middle-class housing downtown.
Still, it will be years before the city’s office market approaches its pre-pandemic frenzy. VTS’s Saia said there is currently a huge difference in activity between the top and bottom floors of offices, and between offices in blocks deemed safe and those in blocks that are not. This is very different from the late 2010s, when everyone and everything was accepted. AI may be on the rise, but as Mobley points out, new leases will never be enough to backfill a significant portion of the empty space.
One-third of the city’s offices are leased It is set to expire by the end of 2025, potentially creating a troubling amount of newly available space. And difficult budget decisions could overtake Mr. Lurie’s reform efforts. Concession tax revenue The city fell off the cliff Expected deficit for 2025-2026 is $867 million. But there is optimism in the sense that the city’s office market has a long, tough road ahead of it, rather than being stuck in an urban doom loop.
“The facility operators who have believed in this market have been doing it so long that they can see an exit,” Saia said. “Companies that have been able to stick to their guns and justify reinvestment internally are actually in a very good position to start capturing all of this demand.”
