— By Colin Yasukochi, executive director, Tech Insights Center, CBRE —
An increasing supply of distressed properties for sale has been met with enthusiasm by a growing number of opportunistic buyers in San Francisco. Prices up to 70 percent lower than the seller’s cost basis, combined with improving fundamentals, has given investors confidence to make property purchases ahead of substantial leasing market recovery.
About $1 billion of office sales volume could be reached by year-end 2024. There are 27 properties totaling 3.6 million square feet that have sold (totaling $338 million), are under contract (totaling $193 million) or being marketed ($453 million). If this occurs, it would be the highest number of properties sold since 2019 and the highest square footage and dollar volume since 2021. The years 2022 and 2023 combined had a total sales volume of $945 million.
Stabilization in the office leasing market has emerged with vacancy and rents little changed and much higher space demand. Second-quarter 2024 vacancy ticked up to 36.8 percent (+0.1 percent), while average asking rents ticked down to $68.43 (-$0.12) compared to the previous quarter.
Demand indicators strengthened with leasing activity and tenants in the market rising in the second quarter of this year. There was about 2 million square feet leased this quarter, bringing the mid-year 2024 total to 3.4 million square feet, or 27 percent ahead of mid-2023. Tenants-in-the-market demand also rose to 6.9 million square feet, which was almost on-par with the 2019 pre-pandemic average of 7 million square feet.
Artificial intelligence (AI) is a leading growth sector in San Francisco, with the area receiving about 35 percent of U.S. AI venture capital funding since 2019. AI companies have also accounted for 25 percent, or 2.3 million square feet of the office space leased since 2023. AI is expected to be a catalyst for future growth as this developing technology evolves and gets implemented in some form by most businesses.
The average price for the nine properties sold thus far in 2024 was $222 per square foot. This compares with $283 per square foot in 2023 and a peak value of $1,106 per square foot in 2022.