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The Future of Commercial Real Estate in San Francisco Doesn’t Look Good

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  • San Francisco’s CRE market began declining in early 2022 and experienced an 18% increase in office vacancies during the first three months of the year.
  • Investors are worried that the Commercial Real Estate market in San Francisco will collapse.
  • The CRE market in San Francisco has a long road to recovery, as many experts point to red flags, and few others point to plausible green ones.

San Francisco’s Commercial Real Estate (CRE) market began crumbling in early 2022, with 18% of office market vacancies increasing during the first three months of the year, according to a recent study from MyListing.

San Francisco had more than 24 million square feet of empty office and commercial spaces at the time of the study.

Class A commercial real estate within the North and South Financial Districts of the city and Class A commercial real estate within South of Market (SOMA) East were the worst-hit areas for negative absorption in early 2022.

The increased speed of decline in San Francisco’s CRE market is primarily because traditional office spaces are being vacated by those who are still working remotely.

Remote workers report being less distracted and more productive on average than when they worked in traditional office spaces.

CRE in San Fransisco has a rough future ahead of it, as many experts point to red flags for the market.

The Future of CRE in San Francisco

That most CRE lenders are viewing CRE in San Francisco negatively is not a good sign.

CRE pessimism “makes it difficult for owners of Class B and C buildings to negotiate to refinance.”

Most leases will expire within the next five years and were signed decades ago when the city was flourishing. Unfortunately, this will worsen the trend of increased office vacancies, which seems likely to continue for at least the next five years.

Even though San Francisco is in last place among 60 cities for its downtown area’s CRE recovery, some investors and lenders are surprisingly optimistic about shifts in the future.

San Francisco, San Francisco, United StatesOptimism and Pessimism in San Francisco

One bright spot is that “the Transamerica Pyramid Center began a $250 million renovation, according to luxury real estate development and investment firm SHVO. This will be the biggest renovation yet for the Pyramid and the biggest investment in San Francisco’s downtown since 2020,” according to MyListing.

This is one major deal in San Francisco real estate, but it is doubtful that its entire CRE market can depend upon one agreement.

Investors will have to make decisions for next moves based on these facts, which will determine the fate of commercial real estate in San Francisco.

With San Francisco Chronicle headlines stating with unfortunate accuracy that “SF is not a market an investor wants to be in,” the future of commercial real estate in San Francisco is precarious at best — and continuing in a downward spiral at worst.

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