Q1 2023 Commercial Real Estate Report: San Francisco, CA
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San Francisco's commercial real estate market struggled in Q1 2023 across most sectors thanks to a combination of low demand, high interest rates, development delays, and a lack of construction activity.
Rents remain stable in the city's multifamily sector but fell virtually everywhere else, while new construction and deliveries slowed down.
General San Francisco Commercial Real Estate Market Trends
Average prices for all types of San Francisco commercial real estate dropped by approximately 0.14% over the past 90 days to $66.09 per square foot and $822,000 overall.
The average size for commercial properties in San Francisco is 12,445 square feet, with a median size of 4,480 square feet.
Notable Commercial Real Estate Transactions in San Francisco in Q1 2023
San Francisco saw a number of notable real estate transactions in Q1 2023, such as:
- Cisco Merkais 246,000 square foot office lease at 500 Terry Francois Blvd;
- Waymo's 78,000 square foot office lease at 555 Market St;
- The Sobrato Organization's $80,000,000 office purchase at 1 Harrison Street;
- A multifamily sale at 629 Guerrero St. for $291,667 per unit;
- Tesla's 148,525 square foot industrial lease at 22290 Hathaway Avenue;
- A $140 million industrial purchase at 500 Pittsburgh Avenue; and
- Wholesale Interior's 154,866 square foot lease at 4100 Whipple Road.
These are select examples among other activity.
San Francisco Office Space Performance in Q1 2023
Like most other major cities in the US, the San Francisco office space market currently faces headwinds after a quarter of falling rents and demand. Nearly 800,000 square feet of negative absorption occurred, and vacancy rates rose 80 basis points in Q1 2023 to a record-high of 23.0%.
Average asking rates for San Francisco office space fell by 0.4% to $74.45 per square foot. Class A asking rates saw a large decrease and fell from $84.83 per square foot in Q4 2022 to $81.73 per square foot in Q1 2023.
The submarket with the highest average asking rates for San Francisco office space was South Financial at $80.44 per square foot.
San Francisco Office Space Construction and Volume
San Francisco added about 300,000 square feet of new product inventory after two consecutive quarters of no new additions. The city currently has an additional 1,125,000 square feet of office space under construction, most of which are Class A properties and slated for delivery in Mission Bay.
High interest rates and low demand have reduced office space investment activity, with only two major sales transactions occuring in the city in Q1 2023. If inflation remains low and interest rates stabilize, we may see better performance in the second half of 2023.
San Francisco Industrial Real Estate Performance in Q1 2023
San Francisco industrial real estate saw mixed performance in Q1 2023, with positive absorption, static vacancies, and falling asking rates.
The market posted 57,008 square feet of positive absorption, and vacancy rates remain static from the previous quarter at 2.8%. Average asking rates for industrial space in the San Francisco peninsula fell from $26.57 per square foot in Q4 2022 to $25.10 per square foot in Q1 2023.
San Francisco Industrial Real Estate Construction and Volume
Both the San Francisco peninsula and North Bay Area had no new deliveries of warehouse, lab, or industrial flex space in Q1 2023. This lack of delivery is due to lower consumer demand as high inflation eats into discretionary incomes.
The San Francisco peninsula has no new industrial space under construction, but the North Bay has over 546,000 square feet under development.
Other parts of the Bay Area, such as Oakland and San Jose, had a comparatively strong performance in the industrial sector, with low vacancies and rising asking rates. Investors seem to be buying industrial space outside of San Francisco proper due to lower property costs and more consumer demand.
San Francisco Multifamily Real Estate Performance in Q1 2023
San Francisco multifamily saw a rough quarter thanks to falling sales prices and increased borrowing costs. Vacancies rose to 7.69%, representing a 1.46% YoY increase, while average rents only rose a quarter of a percentage to $4.02 per square foot per month.
This slow growth is attributable to rising interest rates, stricter lending standards, and general economic uncertainty. Despite this sluggish progress and recent tech layoffs, San Francisco retained low unemployment at 3.60%, and the city's job market continues to grow.
San Francisco Multifamily Construction and Volume
Sales volumes fell drastically this quarter while the average price per unit also fell to $357,589—a nearly 16% drop from the same time last year. Despite these drops, San Francisco remains one of the most expensive cities to rent in the country, with higher housing prices than San Jose or Los Angeles.
The slow market means that multifamily sales prices are, on average, $450,000 less than the asking price, so buyers currently have more bargaining power. The silver lining is that cap rates are trending up, reaching 4.877% in Q1 2023, and experts expect them to break 5% within the next year.
San Francisco Retail Performance in Q1 2023
Like the city's other real estate sectors, San Francisco retail had a sluggish quarter with high availability, falling retail employment, and falling asking rates. Move-outs and move-ins virtually canceled each other out this quarter, with only 86 units of positive absorption. Bay Area retail asking rates fell from over $40 per square foot last quarter to an average of $38.52 per square foot.
Much of this slow activity is due to skyrocketing construction costs: Retail construction costs have jumped over 30% since 2020, making it much harder for developers to finance construction. The city had no notable retail additions this quarter, but 100,000 square feet of new space is currently under construction.
Vacancy rates also rose to 5.7% and total availability rates grew to 4.3%. Demand for retail labor has dropped by 20% YoY, signaling low demand for retail activity.
Takeaways for San Francisco Commercial Real Estate Investors
Overall, San Francisco's commercial real estate market faced several challenges in Q1 2023 as overall economic sentiment remains uncertain. High construction costs have discouraged new development, and large-scale tech layoffs coupled with inflation have exerted downward pressure on consumer demand.
San Francisco real estate may fare better in the second half of 2023 if interest rates stabilize and sales activity picks back up. In the meantime, it's a buyers' market out there, and investors may have to be willing to make concessions to fill vacant space in a timely manner.
Research thoroughly, do your due diligence, and happy investing.
Methodology
This report was written with property information from the MyEListing.com platform in corroboration with other freely available commercial real estate research data.
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