S.F.’s economic pain: 25% office vacancy, more tech layoffs and plunging venture capital funding

Leasing activity totaled around 800,000 square feet, the lowest level in two years. The vacancy rate is more than six times higher than it was at the start of the pandemic, when it was 4%, and is up from 20% a year ago, according to CBRE.

The market isn’t likely to rebound soon: Tech giants and smaller startups alike are trying to slash costs and shuttering mostly empty offices, with Facebook parent Meta and Google instituting hiring freezes.
Salesforce, Airbnb and Twilio all listed San Francisco space for lease in the third quarter, adding to the vacancy rate.

U.S. venture capital funding, the engine of startup growth, fell by nearly 40% from the second quarter to the third quarter, to $43.3 billion. That is its lowest level in more than two years.

San Francisco and San Mateo counties
lost around 2,500 jobs in August,
the first monthly drop in a year. Though San Francisco’s unemployment rate was a minuscule 2.1% in August, layoffs have ramped up in the past month, with cuts at
tech firm DocuSign,
clothing giant Gap
and
scooter company Spin,
among others.

Rising interest rates, high inflation and a slumping housing market are fueling
fears of a recession, and making office expansion even less likely.

“The economic issues over the past few months have caused this stall. There’s a lot of ‘wait and see’ out there,” said Robert Sammons, senior director of Bay Area research at real estate brokerage Cushman Wakefield. “I don’t see the market improving quickly.”

Cushman Wakefield, which uses slightly different methodology, said the San Francisco third-quarter vacancy rate was 23%.

Only a few leases exceeded 50,000 square feet — space for roughly 200 workers prior to the pandemic — including Asana subleasing 70,000 square feet from Macy’s at 680 Folsom St. Planet Labs also renewed and expanded its lease to 72,000 square feet at 645 Harrison St.

The deals were far smaller than
Google’s 300,000-square-foot lease
at the end of the second quarter.

Colin Yasukochi, executive director of CBRE’s Tech Insights Center, said even with low coronavirus cases, remote work is dampening any sustained return to offices and the desire for companies to expand. San Francisco’s office occupancy rate in buildings managed by security firm Kastle
was below 40%
last week, one of the lowest levels in the country.

“San Francisco is sort of ground zero for a lot of these trends,” Yasukochi said. “I don’t think we’re in recovery mode yet.”

A sustained recovery may not come until the second half of next year, he said.

There are some cities with even higher vacancy rates — including Dallas, Denver and Phoenix, Yasukochi said. But the disparity between San Francisco’s surging pre-pandemic office market and its current struggles is greater than in any other U.S. city, he said.

It could get worse. Ted Egan, the city’s chief economist, forecasts that office vacancy rate could exceed 41% in the North Financial District and 34% in South of Market.

Sammons, of Cushman Wakefield, said he doesn’t think it will get that bad. But leases accounting for around 16 million square feet of space, almost a fifth of the entire market, are set to expire in the next three years.

There are some signs of life: developer
Lendlease recently broke ground
on a $1 billion office and condo project at 30 Van Ness Ave., a prominent corner near City Hall and Twitter’s headquarters.

Muni ridership to downtown is noticeably higher during the morning commute, Sammons said. Large-scale events and conferences like Fleet Week and Dreamforce have returned,
boosting the tourism industry.
A
series of community events
meant to bolster civic pride and engagement are scheduled for this month.

Mayor London Breed, speaking Wednesday at a real estate event organized by the San Francisco Business Times, acknowledged downtown’s struggles.

“Uncertainty around work-from-home has shaken the confidence of what lies ahead for us — not just here in San Francisco, but in major cities across the country,” she said, according to prepared remarks. “Today, we need to adapt.”

Breed said efforts include potentially changing the city’s tax structure, incentivizing the conversion of office space into other uses,
speeding up housing permitting
and addressing the police staffing shortage to improve public safety.

“With challenge comes opportunity,” she said. “For reflection, for reinvention, for a resilient city to live up to its reputation.”

Roland Li is a San Francisco Chronicle staff writer. Email: roland.li@sfchronicle.com Twitter: @rolandlisf

Article source: https://www.sfchronicle.com/sf/article/san-francisco-economy-17490125.php

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