San Francisco Market Update: Office Construction Headed Back on Track

By the end of last year, the San Francisco-Peninsula market had 6.1 million square feet of office space under construction, 25.6 percent less year-over-year, CommercialEdge data shows. The amount represented 3.9 percent of total stock, 160 basis points above the national average, signaling a return to healthier levels of activity.

Office vacancy continued to climb towards the end of the year, but the region’s tech and life science sectors re-ignited demand for new Class A product. Construction costs rose drastically by the first half of 2021 and developers powered through. Overall 3.7 million square feet of office space broke ground in 2021 across metro San Francisco, more than double the amount recorded in 2020 (1.2 million square feet).

Deliveries in San Francisco totaled 4.6 million square feet (16 properties) in 2021, up 135.4 percent year-over-year, with crisis-induced delays contributing to a more heightened volume. The amount of new space added last year also exceeds the annual average recorded over the past five years (3.8 million square feet).

Rendering of Kilroy Oyster Point. Image courtesy of Kilroy Realty Corp.

Massive life science projects are underway across both sides of the Bay, with South San Francisco alone registering several million square feet of new space for such tenants. Among these are Kilroy Realty Corp.’s 3 million-square-foot Oyster Point, BioMed Realty’s 2.2 million-square-foot Gateway of Pacific, and Healthpeak Properties’ Vantage (estimated to cost $393 million).

The tech companies of Silicon Valley carried on with large expansion programs, amid continued uncertainty for the office sector. In San Bruno, YouTube announced plans to add over 2.4 million square feet of new office space within a 92.2-acre site where the company’s headquarters is located. City officials approved a development agreement for the upcoming expansion, planned within a 20-year timeframe.

The Bay Area—comprising the East and South Bay—registered just over 7 million square feet of office space under construction as of December, up 26.4 percent year-over-year. The amount represented 3.4 percent of total stock, 110 basis points higher than the national figure. Adding planned and prospective properties into the mix, the Bay Area office construction pipeline reaches 13.8 percent of total stock, an indicator that developers are confident in the market fully rebounding.

San Francisco’s economy might take longer to recover, and the city’s office sector is bound to play a major part in the process. Companies continued to exit California in 2021, but the details of such moves reveal that at least some do not wish to fully abandon the benefits of maintaining a presence in the state. Notably, Tesla announced its move to Austin, but in that same announcement the company said it would expand its operations in Fremont, Calif. In January, data center REIT Digital Realty unveiled plans to move its headquarters from downtown San Francisco, also to Austin, then also revealed it will invest more in Silicon Valley’s digital infrastructure sector.

CommercialEdge covers 8M+ property records in the United States. View the latest CommercialEdge national monthly office report here.