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Market Research - San Francisco

United States: San Francisco office market - H2 2021

Office deal activity remained below pre-pandemic trends. Investment volume decreased by 39.6% year over year in Q4 to $877 million.

Strong Job Growth in 2021 Bodes Well for Office Demand in 2022

Overall economic conditions have improved significantly. The unemployment rate fell to 3.2% in November. Labor markets are repairing themselves as the local economy added 74,700 jobs since November 2020. The strength of hiring in office-using industries and the broader economy will bode well for the recovery of office demand in 2022. 
The rise of the highly transmissible Omicron variant has pushed back the long-awaited return-to-office for many businesses and dampened the recovery of the San Francisco office market in Q4. Vacancy rates climbed to near-record highs, absorption was anaemic and a deep pool of sublet space remained on the market.


Rents Stabilize

On an annual basis, rents have continued to decline as landlords compete with sub-lessors to attract the next deal in the market. For tenants looking for short-term move-in ready space, subleasing is an attractive option. Average asking rents are down 9.2% from the 2019 peak. More expensive Class A product is similarly down by 9.2%.
Speaking to the flight-to-quality trend, San Francisco’s average asking rent increased by 2.0% following six quarters of decline, ending the quarter at $78.67 PSF. 
Asking rents are still 4.2% lower than one year ago and 10.0% below the pre-pandemic peak reached in Q1 2020. 


Investment Volume Below Pre-Pandemic Levels but Cap Rates Stable

Office deal activity remained below pre-pandemic trends. Investment volume decreased by 39.6% year over year in Q4 to $877 million, the weakest quarter since Q3 2020. The trailing 12-month total fell 19.2%. 
Institutional investors became the most active in 2021, accounting for 47.8% of investment volume. 
Private equity is sitting on record levels of dry powder in anticipation of increased sales of distressed assets. The wave of CMBS defaults never occurred during the previous economic downturn and investors have little reason to expect across-the-board price declines, especially in gateway markets like San Francisco.

AAG San Francisco office market H2 2021
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