San Francisco Office Market Sees Fastest Turnaround in US, Driven by AI Investment
0
7
0
San Francisco has emerged as the nation's leading office property sales market, completing a swift turnaround from a period of high vacancy and market uncertainty. According to data from real estate services firm Avison Young, the city logged $4.7 billion in office property trades across 147 transactions through the third quarter (Q3), topping all 12 major U.S. markets.
This total surpassed New York's $4.4 billion (90 deals) and Los Angeles' $2.7 billion (146 deals), signaling a dramatic shift in investor sentiment toward the city's commercial real estate (CRE).
Key Market Metrics
The recovery is underpinned by key financial and transactional milestones:
Sales Volume: Q3 marked the first quarter since 2021 where office sales volume exceeded $1 billion.
Pricing: The average price per square foot saw a 50% year-over-year increase—the first such rise since 2019. Despite this increase, many buildings are trading at a deep discount to pre-pandemic values, which Avison Young's head of U.S. investment sales, James Nelson, described as a "rare entry point."
Long-Term Outlook: If current momentum persists, property values are projected to return to pre-pandemic levels by 2030.
AI Sector Drives Leasing and Confidence
The primary catalyst for the rebound is the explosive demand for space from the Artificial Intelligence (AI) sector, which is reducing available sublease space and stabilizing occupancy.
AI Leasing: Deals tied to major AI companies, including OpenAI, have fueled significant leasing activity. AI-related firms are concentrated in areas like South of Market (SoMa), often seeking flexible, ready-to-use Class A/Trophy office space.
Sublease Reduction: The AI boom is absorbing a considerable amount of formerly vacant space, particularly in the sublease market, which is critical for market stabilization.
Investment Profile: The investment is characterized by both entrepreneurial players, such as Roger Fields of Peninsula Land and Capital, and large institutional buyers, like New York Life, betting on future cash flow growth.
Lingering Risks and Nuances
While investment sales are surging, the underlying leasing fundamentals show a more nuanced picture that raises some long-term questions:
Valuation Worries: The concentration of large deals linked to the AI sector has raised concerns among some observers that a portion of the market's recovery may be running ahead of broader economic fundamentals, echoing past technology boom-and-bust cycles.
Hiring Softening: Recent research from Stanford indicates a softening in early-career tech hiring, suggesting the boom's effects are not uniform across the job market, even as overall job growth continues.
Vacancy/Availability: Despite the sales surge, San Francisco's total office vacancy rate remains high—above 30% in Q3, though Class A and Trophy assets are performing significantly better.
Broader Confidence and Civic Engagement
The renewed confidence extends beyond private investors. San Francisco city officials targeted and acquired the 1660 Mission St. building for the Department of Public Health, indicating a move to secure properties before market appreciation erodes bargain opportunities.
Furthermore, Mayor Daniel Lurie's administration is credited by major landlords with improving the relationship between City Hall and the business community, contributing to a noticeable increase in "city energy," according to observers who note fuller streets and a clearer civic agenda.
