Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

San Francisco Office Market Challenges Continue Amid Layoffs

The Bay Area’s tech layoffs and cost-cutting efforts have continued to dampen San Francisco’s office market, and could exacerbate a slowdown in Silicon Valley as well. The city’s vacancy rate in Q3 was 25.5 percent.

(TNS) — The wave of California's Bay Area tech layoffs and cost-cutting is adding to the struggling San Francisco office market's challenges. It could also exacerbate a slowdown in Silicon Valley, which has outperformed its northern neighbor during the pandemic.

San Francisco's office vacancy rate — based on the amount of office space listed for lease or sublease — was a record high 25.5 percent in the third quarter, according to real estate brokerage CBRE.

The fourth quarter has been quiet so far; there hasn't been a major new lease signed in the city since Google's 300,000-square-foot deal in the first half of the year.

"We really did start to see a slowdown in leasing activity beginning at the end of the second quarter" in both San Francisco and Silicon Valley, said Colin Yasukochi, executive director of CBRE's Tech Insights Center. "The market is slow. It's probably going to remain fairly slow."

Tech layoffs have piled up at major Bay Area employers, including Salesforce,

Twitter and Meta, and companies are increasingly looking to reduce costs, which can mean shutting down offices. Remote and hybrid work also continues to reduce the need for office space, including for Salesforce, San Francisco's largest private employer.

"Before the pandemic, the percentage of remote workers for Salesforce was approximately 20 percent. For other companies now, we're seeing that normalize at somewhere around 50 percent even with mandatory workdays," Salesforce co-CEO Marc Benioff said during an earnings call on Wednesday. "We're never going back to how it was. Everyone knows that."

The company has mandated that some salespeople return to the office, Insider reported last month, but largely allows employees to be flexible and stay remote if they wish.

Amy Weaver, Salesforce's chief financial officer, said the company is "continuing to evaluate" its offices and had previously declined to renew leases. In San Francisco, the company canceled a major lease signed before the pandemic and listed space for sublease at two towers next to Salesforce Tower, adding to the city's vacancy rate.

Benioff previously told The Chronicle that he supported more housing in downtown San Francisco. "We've a very homogeneous downtown," Benioff said. "You have to rebalance."

In Silicon Valley, tech giant growth helped fuel major deals even as many workers stayed home during the pandemic, keeping its office vacancy rate well below San Francisco's.

The region's office market, encompassing all of Santa Clara County, along with Fremont and Newark, had a vacancy rate of 13.6 percent in the third quarter, according to CBRE. The rate has risen considerably from under 6 percent at the start of the pandemic, and it could rise further as office demand slows.

Facebook parent Meta signed two giant Bay Area leases in late 2021, but said in October it expects to spend $2 billion as it shrink its office space next year, on top of $1.3 billion it expects to spend in the second half of 2022.

In Mountain View, Meta closed a 457,000-square-foot office complex earlier this year, which has now been listed for lease, adding to the vacancy rate. Meta also reportedly closed offices in New York and won't occupy a tower in Austin, Texas.

The company hasn't entirely stopped growing. In Menlo Park, Meta is moving forward with a major, 3.5 million-square-foot expansion project called Willow Village that includes housing and offices. City approval could come this month.

ByteDance, the parent company of the hugely popular app TikTok, also leased 657,934 square feet in San Jose in the region's biggest deal of the year so far.

Silicon Valley has another advantage over San Francisco: The majority of its commercial properties are classified as research and development spaces — facilities used for high tech manufacturing and biotech labs, as well as offices — and that sector had an even lower vacancy rate of 9.6 percent in the third quarter, according to CBRE.

The region's vast amount of R&D space, which typically supports in-person work, is seeing continued demand, said Brandon Bain, an executive managing director in San Jose at real estate brokerage Cushman & Wakefield.

Bain doesn't expect a robust 2023 for either R&D or office demand, but expects R&D to continue to outperform office, especially as tech giant demand slows.

"As a market, we will see the downturn that we're seeing in San Francisco and other markets in the country. Because of R&D, we may prove to be more resilient," Bain said. "Many of these tech companies have their core R&D functions in Silicon Valley. Those core engineers would be very hard to replace."

With many tech workers staying home, San Francisco Mayor London Breed wants the city to boost its own R&D capabilities, calling on downtown offices to shift to accommodate biotech lab space and clean technology uses. But it's unclear whether such conversions would be economically feasible and how high demand would be.

The impact of November's tech layoffs has yet to be measured by the government. October figures showed the San Francisco and San Mateo counties had a gain of 14,600 jobs in October, and the unemployment rate remained a minuscule 2.1 percent. Santa Clara County's unemployment rate was just 2.2 percent in October.

The full brunt of tech layoffs aren't expected to hit the Bay Area, as many hires during the pandemic were remote or in other cities, in part because of the Bay Area's tight labor market, Yasukochi said.

CBRE estimates that 80 percent of tech layoffs have targeted non-technical workers in marketing, sales and human resources, rather than engineers.

Yasukochi said he was "not expecting a major deterioration" in the local economy. But he expects the office vacancy rate to stay elevated, potentially for years. In San Francisco, that could mean nearly $200 million in lost property taxes each year as owners seek lower tax bills, according to the city's worst case projection.

(c)2022 the San Francisco Chronicle. Distributed by Tribune Content Agency, LLC.
Special Projects