San Francisco's office vacancy rate hits new high but is expected to soon fall

San Francisco office buildings are more than a third vacant on average, but there's reason to be optimistic, a new report finds.

Why it matters: Office vacancy is one indicator of how well the city is recovering from the pandemic . This remains an area of concern for many cities, especially in San Francisco as it leads the nation in office occupancy losses .

Driving the news: San Francisco's office vacancy rate saw an uptick from 36.7% in the first quarter of 2024 to 36.8% in the second quarter — the highest it's ever been but also the smallest increase since the third quarter of 2021, per a report from commercial real estate firm CBRE.

State of play: Office vacancy is expected to peak then start falling as AI and other emerging tech companies continue to seek out more space, according to CBRE Tech Insights Center executive director Colin Yasukochi.

• The Bay Area remains a leading market for all AI venture capital funding in the U.S., and many of those start-ups have an economic interest in motivating workers to stay in the office, Yasukochi told Axios.

By the numbers: Leasing activity — including new direct leases, subleases and renewals — was 40% higher in the second quarter of the year than in the first.

• Tenant demand also increased to 6.8 million square feet, nearing the pre-pandemic average of about 7 million square feet. It's the highest level since the last quarter of 2019.
• Interest was concentrated around the central business district, Yasukochi added.

What they're saying: "San Francisco has always been a demand-driven market," Yasukochi said. When demand starts to turn around, "optimism really starts to build and things can change rather quickly."

The big picture: Local officials and community organizations worked together in recent months to revive downtown by hosting pop-ups , art exhibits and performances in vacant office areas.

• "I think we've stabilized some of the negative dynamics," city economist Ted Egan told Axios. Now, it's time to "create a kind of positive momentum" by holding events like street fairs to rebuild demand for office space.
• The goal is to attract people back into offices and give them a reason to stay downtown after work, Egan noted.
• Almost a third of Bay Area workers were working from home as of 2022, census figures show.

What we're watching: "We expect to start to see the vacancy rate come down slowly probably ... by the end of the year or into 2025," Yasukochi predicts.