There are even more empty offices in San Francisco where vacancies stand at 25.1%, according to JLL. In a separate March 24 report showing which metro areas had office properties that were most at risk of default, the commercial real estate analytics group Trepp found that tech hubs were highly vulnerable. They have the highest risk rating at 5.9 on a nine-point scale.
Certain city ZIP codes, like the one encompassing San Francisco’s Embarcadero and nearby financial district, have even higher risk ratings, suggesting defaults could be imminent.
These neighborhoods are plagued with aging office properties and outdated amenities from bygone eras, JLL’s Ryan said. He estimated that in US cities, 70% of properties in downtown cores were built 30 years ago. For places like Manhattan and San Francisco, that number rises to 90%.
“These are some of the oldest institutional-grade office stock in the world,” Ryan said.
A property’s financial distress may not immediately affect the building’s tenants, including any retail that might be at the street level. But it often leads to a chain of ownership that can ultimately affect the urban cityscape. in part by incentivizing owners to cut their losses in the short term rather than focus on long-term investment in the property, said Matt Anderson, a managing director at Trepp.
“For a tenant, they typically prefer a long-term owner to be in place,” Anderson said. “They’ll come in and maintain the property and do whatever long-term fixes are needed. A short-term owner is going to be less incentivized to do that.”
Large volumes of office space are still technically leased, Anderson said, but many companies are not fully using them. And when those leases come up for renewal, many tenants will decide they are only using a fraction of what they need.
“As that builds up across lots of tenants, it results in a contraction in the demand for office space,” Anderson said.
And when the demand for office space goes down, so does the demand for the shops and restaurants that depend on office workers to show up and spend money, he said. Trepp estimates national business volume is just 60% of what it was before the pandemic.