Record empty offices hurt SF firms, workers who tailor, repair spaces

The record-high office-vacancy rates plaguing San Francisco don’t just hurt landlords, real-estate agents and small-business owners who rely on commuter foot traffic — they also hurt contractors and laborers who do “tenant improvements,” or the work done to spaces that get leased.

The valuation of the work permitted last year for office alterations and repairs in The City was at its lowest level since 2016, and only a little better in the first half of this year, according to data provided by the Department of Building Inspection.

The $432.9 million total for 2023 was down more than 71% from a peak of $1.5 billion in 2019. The total was $218.5 million for the first six months of 2024.

Not surprisingly, the decrease was precipitous in 2020 with the onset of the COVID-19 pandemic, with work plunging first to $632 million and then $524 million the following year. It rebounded significantly to $849 million in 2022, and then fell by almost half last year.

On the positive side, the permit valuation of work in the first half of 2024 in the Financial District/South Beach area — where by far the largest number of permits have been issued — jumped to $171 million. It had fallen from a peak of $978 million in 2019 to a low of $249 million in 2023.

Tempering the relatively good news, however, was the fact that the valuation of work in the other top four neighborhoods was trending down significantly for the first half of the year.

San Francisco’s office-vacancy rate hit a record high of 37% in the second quarter of 2024, up from 36.7% the prior quarter, according to preliminary data released by commercial real-estate company CBRE.

Industry analysts said they saw increased leasing demand, but they did not expect a substantial recovery soon as the local office market continues to adjust to a reality in which large numbers of employees who once came regularly to offices have routinely worked remotely — and in turn, companies have reduced their office footprints.

Even where companies are taking space, spending has tended to be constrained. Nan Reed, senior director of project management at CBRE, said that companies were being conservative about alterations of leased space.

“Tenants are still operating in a cost-containment environment and opting for spaces that require no or minimal capital investments,” Reed said.

The resulting lack of tenant-improvement work is hurting contracting firms and varied types of laborers alike. Tenant-improvement work can include such tasks as installing carpet or moving walls, pipes and more. It can easily involve multiple trade groups, such as electricians, carpenters, plasterers, plumbers and air-conditioning installers.

Alex Lantsberg, research and advocacy director for the San Francisco Electrical Construction Industry, has been tracking city permit data, and he said workers have taken a hit.

“When the level of work in a particular sector drops by half, that’s going to have deep impacts on the people who do the work,” Lantsberg said. “What is happening in downtown San Francisco is no exception. There are real issues, and they are affecting working people who rely on this ongoing activity for their bread and butter.”

San Francisco is not unique in having high office-vacancy rates, but the lack of tenant-improvement work has hit particularly hard because of a relative lack of construction of new buildings, said Rudy Gonzalez, secretary-treasurer of the San Francisco Building and Construction Trades Council.

“It’s a measurable impact for us in terms of jobs lost in the local economy,” Gonzalez said.

Also losing out from the lack of tenant-improvement work are architects, attorneys, material suppliers, heavy equipment providers and other vendors rendering services to support tenant improvements, not to mention the businesses workers patronize while on jobs, Gonzalez said.

John Grcina, board chair of San Francisco-based Field Construction, which specializes in tenant improvements, said his 30-person company’s business was off 30% since the pandemic.

A veteran of four decades in the construction business, Grcina said this downturn is worse and fundamentally different from others he has experienced because it has lasted so long and is driven by changes in employee behavior and corporate needs as a result of the rise of remote work.

In response, Grcina said his nearly 50-year-old company has reduced headcount through attrition and several layoffs while forgoing hiring.

“Tenant improvements and building renovations are what we do,” Grcina said. “We do everything except dig a hole, plant a foundation and build a building.”

Grcina said the growth of artificial-intelligence companies has provided “a little bit of momentum,” and that landlords have been doing interesting projects, such as installing roof decks and gyms to lure employees back to offices.

The “headwinds,” however, remain substantial, including the fact that there is so much space on the market built out with tenant improvements before becoming vacant, Grcina said. Tenants now looking to lease have a plethora of options for simply occupying such “plug and play” space, he said.

Darcy Narduzzi, vice president/construction manager at the Plant Construction Company, said her company has sought to find work outside of the tenant improvement realm because of the drop in demand, which has also impacted similar companies.

“We have been seeing a lot of project managers who have been laid off looking for work,” Narduzzi said.