Tech company layoffs, unneeded extra space cited as main reason for rise
The office vacancy rate for San Francisco rose to 29.4% during the first quarter of 2023 according to a new study on Tuesday, with the continued pullout of tech firms due to massive downsizing cited as the main reason.
Before the COVID-19 pandemic, San Francisco had a near 100% office occupation rate throughout the city, thanks in large part to the continuing tech boom. However, with the pandemic, many companies began breaking leases to save money, while others embraced stay-at-home work and declined to continue using office space. Even after restrictions were dropped in 2021 and 2022, more companies switching to a work-from-home model or allowing more work-from-home positions kept many companies from returning to offices. In addition, high crime rates as well as a growing number of lease expirations by non-returning companies helped keep vacancy rates well above 20%.
In 2022 however, another major factor quickly spiked vacancy rates yet again. Mass layoffs in the tech industry, which began in earnest in October 2022, quickly wiped out the need for large office complexes and long-term leases. Fueled by economic uncertainty, high inflation, rising insurance costs, more people working from home, the rise of AI and automation, the rise of e-commerce, and many companies overcompensating in employment when online services experienced a spike of growth in 2020 and 2021 that ended when pandemic restrictions ended, many large companies quickly shed thousands of employees overnight. Tens of thousands of cuts came from longtime Silicon Valley stalwarts such as Google, Amazon, Intel, Lyft, Yahoo, and Salesforce, with the most recent large cut by Meta of 10,000 jobs coming only earlier this month.
As a result, the average office vacancy rate in San Francisco quickly jumped from 19% in 2021 to 27% in 2022. However, with layoffs continuing this year and more leases not being renewed, the real estate brokerage CBRE announced on Tuesday that the first quarter 2023 vacancy rate shot up to 29.4%
“There was a weak level of demand,” noted CBRE Tech Insights Center director Colin Yasukochi. “Layoff announcements continued in the first quarter. That all translates to companies needing less space. It’s not going to be an easy recovery. We have the biggest and strongest tech ecosystem which sets us up from future growth and innovation. That’s not going away.”
Mass emptying of office buildings in the first three months of 2023 alone has been pretty jarring even to real estate experts. Downsizing at Salesforce opened up 125,000 square feet of office space inside Salesforce Tower, the city’s tallest building. Reddit leaving their offices opened up just under 50,000 square feet. Meta getting out of 181 Fremont opened up a whopping 435,000 square feet of office space. On Tuesday, Pinterest became the latest major pull out of office space in San Francisco as they announced they would be leaving several buildings in the city due to layoffs last month.
A 29.4% office vacancy rate
However, despite the massive losses, San Francisco has continued to be slow in reacting to the worsening office space vacancy crisis.
“I mean, at nearly 30%, the city has to be kicking itself for not responding sooner,” Michelle Duggan, a building occupancy researcher, told the Globe Tuesday. “Right now they have a big ordinance proposal in converting office space to housing, but even if that was passed tomorrow, it would still be years before we saw any effect of it on the vacancy rate. The city is also trying to entice businesses to stay by offering stays on tax increases, some tax breaks, and other ideas that don’t hold weight long-term. The fact that more companies are leaving the city shows that all of these attempts are just not working. And the city is very worried about losing that huge tax base and the effects of it hurting Downtown small businesses and everything from BART ridership to housing costs.”
“The obvious solution, lowering taxes, is something the city does not want to do, even though it could keep enough companies from leaving. A more plausible help could be to encourage companies to have employees shift between home office work and working at an office downtown and focus on human interaction over conducting business remotely all the time. Or they could just swing for the fences like Chicago has done in the past and try to get big companies to relocate there. Maybe get the Bank of America headquarters back from Charlotte.”
“Realistically though, San Francisco is going to be in a rough patch for some time. How people work is changing, and they need to compensate for that with new models for cities and workspace. But they’re fighting the change right now, and that’s how we get nearly 30% vacancy rates.”
Office space vacancy in San Francisco is expected to grow more throughout the year.
