2024 Mid-Year Office Market Report: Part Five

CompStak conducted a detailed analysis of office leasing trends for Q2 2024, uncovering significant shifts in lease terms, concession ratios, and effective rents across major U.S. markets. Using CompStak’s extensive data, we’ve identified a notable increase in lease terms driven by law firms and government tenants, as well as rising rents in Prime Class A office spaces. Our upcoming blog series will break down these key findings, offering a closer look at the evolving office real estate landscape.

Interested in exploring the full report? Find it here.

Prime and Other Class A Concession Ratios Rose in 2024, While Class B/C Declined

Analyzing average concession ratios by Prime Class A, Other Class A, and Class B/C leases showed trends consistent with gateway market averages: Class A and top-tier properties continue to display elevated concession ratios, while Class B/C buildings are plateauing or declining. Leases in Prime Class A buildings and other Class A buildings captured concession ratios well above 2018 and 2019 levels in 2024, while Class B/C concession ratios have trended down the past two years. In 2024, Prime Class A concession ratios reached 13.8% of deal value, while they increased to 13.2% in other Class A buildings.

2024 Market Rent Index for San Francisco and the Bay Area Shows Mixed Recovery, with Steeper Declines in San Francisco

According to CompStak’s starting rent indexes for the San Francisco and Bay Area office markets, both indexes have increased by 45.1% and 43.6%, respectively, from their baseline in the third quarter of 2008 as of Q2 2024, despite the negative impact of the pandemic over the past several years.

However, both markets have displayed mixed recovery results, with values fluctuating in recent quarters. San Francisco and the Bay Area reached their post-pandemic troughs just recently, in Q1 2024 and Q3 2023, respectively. However, observing the index reveals that San Francisco’s index values were more negatively impacted since 2020, with the most recent value still down 27.9% from Q1 2020. In contrast, the Bay Area is down by a substantially less dramatic figure of 4.2%. In the most recent quarter, the overall gateway market rent index slightly surpassed its Q1 2020 level, in contrast to these specific West Coast markets.

Office Market Starting Rent Index: San Francisco and the Bay Area

Effective Rent Trends Show Uneven Performance, with Only Prime Class A Surpassing Pre-Pandemic Averages in 2024

Effective rental rate trends in the office market in San Francisco and Bay Area have shown mixed performance over the last several years, While effective rent averages ticked up in 2022 for both Class B/C and other Class A leases, they failed to recover to pre-pandemic levels and remain below that threshold as of 2024. Similarly, the Prime Class A effective rent average increased from the end of 2020 through 3Q 2022, reaching a post-pandemic peak, but has since wavered. As of 2024, Prime Class A quarterly effective rents are 9.6% higher than the 2018-2019 average, while rents in Other Class A and Class B/C buildings are 7.5% and 15.7% lower, respectively. The premium for Prime Class A space in San Francisco, along with effective rents for Other Class A and Class B/C leases, has widened compared to 2018-2019 levels—a trend also seen in gateway markets overall.

San Francisco and the Bay Area, Average Effective Rents

San Francisco and Bay Area Prime Class A Lease Term Average Down Most Since Pre-COVID, But Rising for the Last Three Quarters

Compared to the rising trend in Prime Class A average lease terms in other gateway markets, San Francisco and the Bay Area have trended differently, experiencing a 15.9% decline from their 2018-2019 pre-COVID average. However, lease terms in this market have shown positive growth over the last three quarters. While average lease terms remain suppressed across all building classes, including Class B/C and other Class A buildings, the decline in Prime Class A leases has been the most dramatic. As of Q2 2024, the average lease term for Class B/C buildings is 73.5 months, down 6.3% from the 2018-2019 average. It has remained below the pre-COVID average, except in Q3 2023 when Western Digital signed a 588,000-square-foot, 15-year lease in Milpitas.

Other Class A buildings outside of Prime assets have fared better with lease length improving for the last three quarters and now just 1.8% below a Pre-COVID level. Leases signed in 2024 boosting that average included Orrick’s 155-month deal at 405 Howard Street in the South Financial District of San Francisco and Acco Engineering System’s lease for 143 months at 5890 Owens Drive in the Bay Area’s Pleasanton submarket. 

TAMI Tenants Dominated Office Relocations within the San Francisco Bay Area Market since April 2020

Despite the well-document challenges of the office market in San Francisco and the Bay Area due to tech companies’ strong relationship to remote and hybrid work and pullback in office demand, TAMI tenants still accounted for the majority of documented relocations within the San Francisco and Bay Area office market tracked by CompStak since April 2020. Accounting for 43.7% of relocations tracked by the tenants’ new location’s square footage, they accounted for more than 3 times the relocations by square footage as the next largest major industry category, FIRE, which represented 13.6% of relocations. This breakdown is on par with the current occupancy in San Francisco and the Bay Area, according to CompStak’s data, which shows that TAMI and FIRE account for 50% and 15% of active square footage respectively. 
Among the largest relocations by TAMI tenants are the artificial intelligence company, Scale AI, who relocated from 155 5th Street in the Yerba Buena submarket to 650 Townsend Street in Showplace Square after signing a 170,284-square-foot lease in Q2 2024. The multinational law firm, Goodwin Proctor, also signed a sizable lease of 58,991 square feet in a relocation from 3 Embarcadero Center in San Francisco’s North Financial District to 525 Market Street in the South Financial District in Q1 2024.

San Francisco and Bay Area Office Relocations by Industry from April 2020

FIRE Tenants Preferred Moving to Larger, Newer, and Higher-Class Buildings

Since April 2020, TAMI and FIRE tenants in San Francisco and the Bay Area have generally relocated to larger, Class A buildings. TAMI and FIRE tenants relocated to properties with an average building size of 348,723 square feet, while the building size of the previous location averaged 325,015 square feet. Overall, a majority of relocating TAMI and FIRE tenants also tended to move from a Class A building to a building of the same class or upgrade to a higher-class of building. However, a larger share of FIRE tenants opted to move to newer buildings compared to TAMI tenants — 60.4% compared to 40.5%.

Relocations Tracked since April 2020, Building Class Share, Previous Location vs. New Location

Share of Tenants Relocating to Newer Buildings

San Francisco’s Financial District Submarket and the Bay Area’s Oakland Submarket Led for Office Tenant Relocations since April 2020

Among the 39 total San Francisco and Bay Area submarkets analyzed by CompStak, a total of eight saw a net gain in their share of total tenants since April 2020 among the data set of tenant relocations analyzed. Meanwhile, 13 lost share, and 18 remained stable in terms of net change.

In San Francisco, these relocations were most heavily concentrated in moving to the North Financial District, South Financial District, and Jackson Square submarkets. Meanwhile, San Francisco’s Rincon Hill/South Beach, South of Market, and Lower South of Market submarkets saw the biggest outflow.

The Oakland submarket saw the largest net gain overall in the Bay Area specifically, followed by those of Concord, Newark/Fremont, North San Jose, and Santa Clara. The Bay Area’s Menlo Park, Milpitas, Oakland Airport South Oakland, Berkeley, and Walnut Creek each saw net loss in share of relocations—more tenants relocated out of these areas as compared to within their boundaries.

Change in Submarket Share, Prior Locations vs. New Locations