Q1 2023 San Francisco Office Occupier's Guide

San Francisco’s rent deflation continues with the average rental rate quoted by landlords dropping quarter over quarter to $72.09 from $74.95. The average sublease rental rate this quarter is $56.20. Leasing activity dropped to 880,000 SF from a quarterly average of 1.02M SF in 2022 and represents a 42% decline from 2.1M SF of leased space in 2019. 

As companies evolve their hybrid work models, competition increased among tenants seeking smaller suites. At the end of 2019, there were a similar number of tenants seeking spaces 5,000-15,000 SF and 15,000-50,000 SF - 39.7% and 41.1% respectively. In Q1 2023, 65.1% of tenants were looking for 5,000-15,000 SF, and demand dropped to 25.8% looking for spaces 15,000-50,000 SF.  Tenants looking for 50,000+ SF dropped to 9.1%, down from 19.2% of tenants in 2019.  

Over the last few years, the tenant composition driving office demand also changed.  Financial and legal companies are increasingly important, comprising 20.2% and 17.4% of all tenants in the market, by size, respectively. This is an increase from 12.8% and 5.2% in 2019. In Q1, tech companies comprised 31.4% of total demand, down from 47.9% at the end of 2019.  

According to Pitchbook , VC funding of Bay Area companies totaled $11.57B during Q1 2023 with $6.5B going to just one company - Stripe. If we remove Stripe’s Series I fundraise from the total, this is the lowest VC investment on a quarterly average since 2013 and is just 24% of quarterly VC investments made during 2021-2022. Microsoft invested an additional $10B in OpenAI this quarter fueling Generative AI startups and VCs are incentivizing implementation of AI features into startup applications.