Bay Area office vacancies balloon to all-time highs as tech wobbles

Office vacancies in the Bay Area have ballooned to all-time highs -- and could worsen in 2024.

SAN JOSE — Office vacancies in the Bay Area have ballooned to all-time highs — and might even worsen in 2024 — fresh evidence that tech cutbacks still haunt the region’s wobbly office market, a report released Tuesday shows.

The office availability rate soared to record levels at the end of 2023 in both Silicon Valley and San Francisco, according to a report released by Savills, a commercial real estate firm.

The sluggish state of the tech industry in the Bay Area is deemed to be the driving force behind the sky-high availability levels for offices, Savills reported. The office availability rate is a combination of vacant space plus space being offered for sublease.

Silicon Valley’s office availability ended 2023 with a record high of 27.5% — which means well over one-fourth of the region’s office spaces were empty and being offered for a direct lease from a property owner or sublease from a tenant that was seeking to downsize its occupancy footprint.

San Francisco’s office availability level at year’s end was far worse — an all-time high of 36.7%. This benchmark indicates that more than one-third of San Francisco’s office space was empty and being made available for lease or sublease.

The huge amount of empty and available office space in San Francisco is being driven in large part by a perceived “doom loop” of crime, homelessness and economic woes in that city.

“With return-to-office rates amongst the lowest nationally and occupier concerns about declining quality of life and safety, expect leasing activity (in San Francisco) to remain lower over the short-term, especially as the technology sector continues to right-size after years of venture capital-fueled growth,” the Savills report stated.

In Silicon Valley, the office availability rate rocketed higher despite a massive sublease deal that Walmart signed in Sunnyvale during the fall that totaled 719,000 square feet. Walmart has agreed to fully occupy a four-building Sunnyvale tech campus that Facebook owner Meta Platforms had leased but never occupied.

It wasn’t immediately clear when Walmart would move into the Sunnyvale buildings, which are located on Crossman Avenue and are collectively known as the Moffett Green tech campus.

Sutter Health, in another big office deal, leased 324,000 square feet that will enable the healthcare titan to occupy three buildings in Santa Clara.

Despite all this, 2023 was a brutal year for the Bay Area office market and looks to get even worse as 2024 unfolds, the Savills report indicated.

“Office availability (in Silicon Valley) remains at an all-time high and is expected to increase even further as return to office rates have lagged the rest of the country,” Savills stated in a report prepared by Erin Proto, the commercial real estate firm’s regional research director.

Downtown San Jose’s office market is in a particularly tough state, with an office availability rate of 35.7%, according to Savills.

Santa Clara is struggling badly with an office availability level of 30.5% at year’s end.

The ongoing retrenchment of the tech sector continues to shove vacancy rates higher in Silicon Valley.

“Many large technology companies have realized they now have too much space,” Savills stated in its report.

Rental rates have weakened in Silicon Valley for office buildings. Asking rental rates for offices were $5.10 a square foot per month at the end of December, down from $5.16 at the end of September.

Despite the emergence of artificial intelligence as a dynamic new industry, A.I. firms aren’t leasing space in nearly large enough amounts in the Bay Area to offset the wide-ranging office vacancies in the region.

“Expect office leasing activity to remain lower (in Silicon Valley) as long as the technology sector, which is the primary driver of space demand locally, remains in a correction,” Savills stated in the report.