New Year, More Leverage

In March, we’ll hit the 4-year anniversary of the date when offices all over the city first shut down due to the pandemic, a time when just 5% of the city’s office inventory was available.  Today, despite having more office workers now than we had then, just under 30m sf of our total supply sits vacant, and even more than that is available.  Citywide average asking rental rates declined 17.5% during this period.  We expect this trend to continue, possibly to accelerate in 2024.  Sublease supply is pulling rates down as companies increasingly view any recovery as a net positive.  There’s little on the near-term horizon to suggest we’ve begun (or will even begin in 2024) the long march toward recovery.  The market dynamic is considerably worse than that which we experienced in the dot-com recession when it took 63 quarters to get from bottom to peak.  We’ve not yet reached the bottom.   

We often talk about the current environment as a “generational opportunity” for occupiers to negotiate favorable lease terms.  While tenant leverage has been excellent over the past couple of years, as we begin 2024 it has accelerated, yet again.  The moment is nothing short of the most compelling time to lease an office in San Francisco over the past 50 years.  This is the silver lining.  Abundant supply, low rent, significant concessions, and maximum flexibility.  If getting the office right is among your objectives in 2024, congratulations, your timing is impeccable.