SAN JOSE — Office vacancy rates in the Bay Area’s three largest downtown districts crept up to sky-high levels in the third quarter of 2023 as tech companies slashed their workplace footprints, a new real estate report shows.
Downtown San Jose, downtown Oakland and downtown San Francisco all are struggling with office vacancy levels near or above 30% — record highs in Oakland and San Francisco, and hovering just shy of the all-time high in San Jose, according to preliminary reports CBRE, a commercial real estate firm, provided to this news organization.
According to CBRE, San Jose had a 31.5% downtown vacancy rate, which measures the amount of space directly offered by landlords, in the July-through-September third quarter of 2023. That’s up from 26.6% in the second quarter. Oakland’s downtown office vacancy rate was 29.7% in the third quarter, an increase from the 28.5% vacancy rate in the second quarter. And San Francisco’s downtown office vacancy rate was an eye-popping 33.9% in the third quarter, up from 31.6% the previous quarter.
The growing amount of empty office space in the Bay Area’s three largest downtown districts offers a harsh reminder of the ongoing economic fallout from the coronavirus-linked business shutdowns of 2020 and 2021. But despite the grim current picture for office space in the Bay Area, CBRE executives say they are seeing some signs of improvement.
“Tenant demand increased again this quarter, which was the most new organic demand in Oakland since 2020, as companies implement office mandates,” said Scott Greenwood, a CBRE senior vice president.
CBRE also believes some signs of improvement have materialized in downtown San Jose and elsewhere in the South Bay.
“There’s no denying the higher-than-average vacancy in Silicon Valley, but the stats are a snapshot of time, not a crystal ball for the future,” said Steffen Kammerer, a CBRE senior managing director. “With more tour requests for top-shelf inventory in the past month and increased commuter traffic, we are optimistic that the market is turning.”
Still, when sublease space is taken into account, the landscape of empty offices in the three downtown districts is even more grim.
Downtown San Jose had a 32.7% availability rate — the amount of directly available vacant space combined with sublease space on the market — in the third quarter, up from 27.8% in the second quarter. Downtown Oakland had a 33.4% third-quarter availability rate, up from a second-quarter rate of 32.3%. And downtown San Francisco saw a 37.5% rate in the third quarter, up from 34.2% in the second quarter.
“The Oakland office market still has a long road ahead to recovery, with several more quarters of negative absorption as tenants right-size,” Greenwood said. “But we’re starting to see positive signs for activity into 2024.”
Any improvements in the micro-economies of the three downtowns are likely to be caught in an ongoing tug-of-war between companies that seek to get their workers back in the office for as many hours a week as possible and employees who are reluctant to spend more time away from home.
“Employers want their people back,” said Russell Hancock, president of Joint Venture Silicon Valley, a San Jose-based think tank. “The countervailing force is the employees themselves. These two forces are squaring off and things are being sorted out.”
Ultimately, the urban cores of the Bay Area’s three largest cities could be facing long-term changes, experts suggest.
“This is an existential shift for the downtowns and their functions,” said Mark Ritchie, president of San Jose-based Ritchie Commercial, a real estate firm. “But because of the tech industry, we might surprise ourselves again. The upswing will come sooner than people think and it will be bigger than people expect.”
San Jose’s downtown could experience a game-changer once Google begins development of its proposed transit-oriented neighborhood of offices, homes, restaurants, shops, hotel rooms, parks, cultural centers and entertainment loops near the Diridon train station and SAP Center.
But Google has paused the project while the search giant reassesses the timeline for the transit village.
“We’re downtown five days a week and things are still pretty quiet now compared with pre-pandemic,” said David Taxin, a partner with Meacham Oppenheimer, a commercial real estate firm.
Even so, San Jose officials have decided to pursue upgrades for the downtown of the Bay Area’s largest city regardless of when Google launches its Downtown West neighborhood.
For downtown San Jose, city leaders are seeking more police foot patrols, a launch of grants to activate stores, improved lighting, downtown ice skating and a wider partnership with San Jose State University to improve vibrancy in the downtown.
“We can’t wait on future development,” San Jose Mayor Matt Mahan said in an interview with this news organization, “to build the downtown that we want to have.”