April 2023: Q1 San Francisco Apartment Insider

Starting off with the downtown office market (and the workers to fill the vacant apartments), the San Francisco office vacancy level increased to 32.7% in the first quarter this year. This rate is an all-time high. The vacancy rate in the fourth quarter of 2022 was 32.1%, according to Savills, a commercial real estate firm.

As far as asking rates on office rents in San Francisco, the average monthly rent was $5.89 per square foot in the first quarter of 2023. This was down from $5.94 per square foot rate in the fourth quarter of 2022.

The largest lease deal of the quarter was a nice show of confidence (in San Francisco) by Cisco Systems. The company’s Meraki division renewed a 247,000-square-foot office lease at 500 Terry Francois Blvd. in Mission Bay for seven and a half years.

The underlying concern downtown is the state of the commercial financing. In the US, more than 50% of the $2.9 trillion in commercial mortgages need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350-450 basis points. Cohen & Steers estimates commercial real estate at a more than $20 trillion market in the U.S. Relative to the size of this market, the CRE mortgage market underlying it is around $4.5 trillion.

Looking at politics, there is been a bit more momentum from local and state government to allow for change of use from office to residential (in an attempt to breathe new life into downtown(s)). Assembly Member Matt Haney has introduced legislation that could make office-to-residential conversions faster, easier and less expensive. The Office to Housing Conversion Act, or AB1532, would “stop local governments from slowing down or killing office-to-housing conversions by making their approval automatic and imposing strict time limits on all building permits,” according to Haney’s office. It would also “block local governments from ‘nickel-and-diming’ projects to death by capping unnecessary fees and design requirements.” The creation of a fund — the California Downtown Recovery Catalyst Fund — would provide grants to projects that turn unused office space into housing. I like the idea of the legislation but am not so sure about a “California Downtown Recovery Catalyst Fund” as that generally equates to “taxpayer funded.” 

Speaking of conversions, last quarter I reported on 988 Market Street aka The Warfield Building and the owners’ intent to convert use from commercial to residential. Although the plan to convert use has been desired by the owners for years, the formal plans are moving forward. The plans for the building would yield 34 condos; a mix of 15 studios, 9 one-bedrooms, 5 two-bedroom and 5 three-bedroom units, with a second floor gym; seventh floor roof deck and basement parking for 34 bikes.

Checking in on apartment rent rates, the weighted average asking rent for an apartment in San Francisco is holding at around $3,600 per month, which is the same as it was at the start of the year and is 6% higher than at the same time last year (also 18% below its 2015-era peak of nearly $4,500 a month). The average asking rent for a one-bedroom in San Francisco is now $3,000 per month (3% higher than at the same time last year).

Looking at inventory, the number of apartments listed for rent in San Francisco is down around 7% over the past month and is over 60% lower than at the pandemic’s peak. 

On to the numbers or the quarter.