Office buildings loomed over a mostly empty Front Street in the Financial District in March. (Kevin N. Hume/S.F. Examiner)

Office buildings loomed over a mostly empty Front Street in the Financial District in March. (Kevin N. Hume/S.F. Examiner)

Downtown office vacancies remain high, but interest in leasing may be rebounding

Dropping rents may draw in new, smaller tenants even as some large companies stick to remote work

Though San Francisco still has a high rate of office vacancies coming out of the COVID-19 pandemic, interest in leasing has rebounded despite remote work plans in a positive sign for downtown’s economic recovery, according to city officials.

Nearly all of the demand for office space in San Francisco that evaporated in much of 2020 has been recovered, according to a national office demand index that tracks office touring data. Though Ted Egan, The City’s chief economist, cautioned that reducing vacancies would take time, he called the apparent rebound a “bright spot” at a hearing at the Land Use and Transportation Committee on Monday.

The fresh assessment on office vacancies left Supervisor Ahsha Safaí, who called Monday’s hearing, optimistic for a strong revival for the downtown economic core fueled by returning office workers. But he said he suspects the recouped demand may still not warrant the same level of office development as was seen before the pandemic.

Office vacancies hit a rate of 19.7 percent in the first few months of the year, after spiking from just 3.7 percent at the end of 2019 to 16.7 percent at the end of 2020.

“I have a feeling that the amount of expansion we were experiencing in terms of office space production will not be at that breakneck speed,” Safaí told the Examiner. “We will still see significant investment we had on the horizon still go forward. I think the plans will be adjusted to have more housing.”

Of The City’s 25 largest business taxpayers, 12 have either said they plan to return to their downtown offices like normal or are have not specified intentions. Seven plan to conduct remote work permanently and five plan for a hybrid of remote and office work, the chief economist determined.

However, some office space vacated by larger companies could make room for other tenants that were previously priced out, like nonprofits.

Office rents declined 0.6 percent throughout 2020 to $54.09 per square foot and are expected to decline further, which could attract smaller tenants. Moody’s Analytics forecasts average rents will drop 15 percent in 2021 and 1.8 percent in 2020.

There’s now 8.4 million square feet of office space available for sublease, a record-high amount. In the aftermath of the dot-com bust in 2002, there were 5.1 million square feet available for sublease, Egan noted.

“There’s still a lot of supply relative to demand, but it is starting to move in a direction of equilibrium and that is a sign of a normal market adjustment taking place,” Egan said on Monday. “This adjustment is not always fast — it took several years, for example, after the dot-com boom — but it is likely to occur.”

The abundance of office space had Safaí questioning whether to adjust the 2018 Central South of Market development plan, passed in 2018 to bring an estimated 33,000 new jobs and 8,300 new homes to the area.

But Supervisor Myrna Melgar said there are too many uncertainties at this time, with businesses and workers still figuring out work preferences. Egan noted it would take a while for the market trends that informed the Central SoMa plan to return.

“To make conclusions about whether or not we need Central SoMa still or any of that stuff would seem to me a little bit premature,” Melgar said. “Because we just don’t know how space is going to be used. There’s just too many questions in the air to me right now

.”

imojadad@sfexaminer.com

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