San Francisco Retail Market Report

Vacancy reaches inflection point. Rising interest rates and widespread inflation have negatively impacted consumer sentiment both nationally and locally, while the prevalence of hybrid work schedules significantly reduced daytime foot traffic downtown. As such, leasing activity has slowed, causing availability to rise. Entering this year, the rate is up roughly 250 basis points since 2019, marking a new all-time high. Nevertheless, vacancy may have hit an inflection point and fundamentals could begin to turn the corner. As of early 2023, there were only two notable projects in the pipeline totaling just under 100,000 square feet. Expanding tenants will be required to take up existing space, promoting falling vacancy and positive rent growth on an annual basis for the first time since 2014. Meanwhile, the Union Square Alliance announced plans late last year to revitalize the submarket. Their intentions include increasing security and providing greater flexibility in zoning that will broaden the economic base of the neighborhood. This should help improve local space demand; however, vacancy will likely remain above the long-term average until business travel, tourism and office-usage rates return to normal levels.