San Francisco Office Deals Slowest Among Gateway Markets

The global tech hub started the year off slowly, continuing on an already decelerating path. As last year wound down, even with Google’s removal of the San Francisco Bay Project, the tech and life science sector saw significant office space being added, while San Francisco office properties changed hands at a high average price per square foot.

As of January, the metro’s under-construction pipeline amounted to 6.8 million square feet of office space spread across 30 properties, accounting for 3.7 percent of the existing stock, higher than the national rate of 1.6 percent. Across life science markets, Boston led with 5.2 percent while other gateway metros recorded low figures, such as Los Angeles (0.8 percent) and Chicago (0.5 percent).

Office construction activity was limited in 2023

A significant project currently underway is Kilroy Oyster Point’s Buildings D, E and F, that broke ground in late 2021 and are scheduled to come online this June. The three life science buildings will total 865,000 square feet and are part of the second phase of Kilroy Realty’s 3 million-square-foot waterfront project. Also dubbed as Gravitate, the $940 million addition to the 50-acre megaproject has JLL as leasing agent.

Since the start of the year, there was only one office property delivered in the metro. Brittan West, a three-story, 173,731-square-foot life science building came online in January in San Carlos, Calif. The site was sold to the Florida State Board of Administration in 2021, for $177 million, while developers Premia Capital and Prince Street Partners retained their ownership interest in the asset.

Construction starts in 2023 totaled 3 million square feet across 14 properties, while deliveries amounted to 1.9 million square feet across 14 properties. In August and September 2023, Tishman Speyer completed two office projects totaling 613,552 square feet of Class A office space. The eight-story Building B and the 13-story Building G are part of the developer’s Mission Rock, a waterfront community that will encompass 1.6 million square feet of office and retail space.

Another office property that came online last year is Alexandria Real Estate Equities’ 751 Gateway Blvd., a R&D building totaling 230,592 square feet that was completed in October. The property is within the submarket of South San Francisco and is part of Gateway North Campus’ expansion. The seven-story life science property is developed in partnership with Boston Properties.

San Francisco office deals lagged

CommercialEdge data shows that as of January 2024, San Francisco had recorded very limited sales activity. That comes as no surprise, as last year ended with 2.3 million square feet across 23 properties changing hands for a total of $722 million. Among gateway metros, Manhattan led with $2.4 billion in office sales, followed by Boston and Washington, D.C., both with $1.9 billion, Los Angeles ($1.7 billion) and Chicago ($1 billion).

Office properties in San Francisco traded at an average $314 per square foot, as the market still carries a high price compared to other gateways like Los Angeles and Chicago, where office assets were sold at $266 and $109 on average. In terms of average price per square foot in 2023, Manhattan led with $833, followed by Boston at $346.

One of the priciest office deals in the metro was Gaw Capital Partners’ $82 million acquisition of North Park, a 294,000-square-foot, Class A office building in San Francisco’s North Waterfront submarket. EQ Office sold the asset in December 2023, while ING Group Bank originated a $150 million acquisition loan.

Another significant sale was The Sobrato Organization’s $80 million purchase of One Harrison, a 1918-built low-rise office building in the metro’s South Financial District. The 200,000-square-foot property was sold last February by Gap Inc.

In November, Rubicon Point Partners picked up a 137,031-square-foot office property for $72 million. Built in 2000, the asset at 123 Townsend St. was previously owned by CBRE Investment Management, which had acquired it for $132.6 million.

Fluctuating office vacancy rate pointed upwards overall

As of January, San Francisco’s office vacancy rate was 23.8 percent, higher than the national 17.8 percent. Since the start of 2023 the rate has fluctuated significantly. Starting at 18.8 percent in January, the index continued to increase to 21.7 percent in July. The highest vacancy rate was recorded in November 2023, when numbers reached 24.2 percent.

The metro’s January vacancy rate was the highest across similar markets, with the lowest registered in Washington, D.C. (17.2 percent), while other metros had figures higher than the national average, such as Chicago (18.1 percent) and Seattle (22.9 percent).

Significant lease agreements signed in 2023 in San Francisco include Alexandria Real Estate Equities Inc.’s long-term deal with CARGO Therapeutics, in December. The tenant signed a 99,557-square-foot deal at Building 2 of The Alexandria Center for Life Science, a 276,945-square-foot Class A laboratory and office property in San Carlos, Calif.

Earlier, in June, DivcoWest secured a 44,000-square-foot long-term lease at its 5000 Shoreline Court, a 140,000-square-foot office building in South San Francisco’s Sierra Point life science cluster. JLL negotiated on behalf of the tenant, clinical-stage precision medicine oncology company IDEAYA Biosciences.

In April, tech company Silergy Technology signed a 27,715-square-foot relocation deal at the Santa Clara Gateway office campus. The tenant expanded its Silicon Valley corporate footprint at the property while also relocating its headquarters. Irvine Co. owns the three-building office complex.

San Francisco’s coworking sector slow but steady

As of January, San Francisco had 2.1 million square feet of shared office space, outpaced by Manhattan, that led with 9.2 million square feet, Los Angeles (4.3 million square feet), Chicago (3 million square feet) and Boston (2.6 million square feet).

San Francisco’s share of coworking space as percentage of total leasable office space reached 2 percent in January, higher than Chicago (1.9 percent), Washington, D.C. (1.6 percent) and Boston, that was on par with the national average of 1.7 percent.

Year-to-date through January, WeWork had the largest footprint of leasable office space in the metro, with locations totaling 915,702 square feet. The flex office provider was followed by Regus, with 270,111 square feet, Spaces (177,599 square feet), Studio by Tishman Speyer (158,000 square feet) and Industrious (128,443 square feet).