SF office market rebounds after bottoming out

San Francisco’s office market is rising from the dead.

In the hardest hit office market in the nation, the number of companies hunting for cubicle space is rising, with AI firms leasing blocks of offices and sellers starting to close office deals again, the Wall Street Journal reported.

The city’s Downtown had suffered an exodus of tech workers during a pandemic shift to remote work. One in three offices stood empty. Building values fell. Crime rose. Businesses such as Nordstrom fled.

Now San Francisco’s office market is looking up for the first time since the pandemic.

Investors have bought or agreed to buy five major office towers, making this year the busiest for sales since 2019.

The reason for the turnaround: Sellers are accepting prices that would have been unthinkable four years ago. 

A local investment group bought a tower at 350 California Street for $61 million, a fifth of what it was worth before the pandemic. Other office sales have gone for half or less of the property’s value before 2020.

Investors and landlords say such capitulation is a critical first-step toward halting a plunging real-estate market.

The first few sales are helping peg the value of San Francisco’s office inventory, according to WSJ. That knowledge tells landlords what to ask for their properties should they wish to sell. It tells investors how much of a discount to expect. 

The recent sales “is part of the adjustment that we’ve been waiting for,” Ted Egan, San Francisco’s chief economist, told the newspaper. “The market-moving is healthy.”

New valuations have helped reset office rents. 

Swig and SKS Partners, which acquired 350 California Street, now ask rents between $50 to $70 per square foot. Before the pandemic, asking rents for comparable offices hovered at $90 a square foot, Connor Kidd, CEO at Swig, told WSJ.

San Francisco office landlords had for decades charged some of the highest rents in the country for decades, with some companies fleeing for cheaper climes. Now rent levels have dropped enough that tenants once priced out of the city can afford offices. 

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Office brokers said that companies are now on the hunt for 4.5 million square feet of offices in the city, compared with 2.5 million square feet in January. 

Much of the demand has come from artificial intelligence firms. Six companies, including Hive AI and Hayden AI, have leased 150,000 square feet, according to CoStar. Anthropic is also close to subleasing 230,000 square feet at the former Slack headquarters, while ChatGPT creator OpenAI is cutting a deal with Uber Technologies to sublease 200,000 square feet.

“When prices come down, it makes San Francisco competitive again,” Nigel Hughes, senior director of CoStar Group, told the outlet.

— Dana Bartholomew