San Francisco's office market is starting to recover—but the pandemic plummeted the sector into a deep hole. According to the fourth quarter report from Avison Young, the office vacancy rate has surpassed the former peak in the financial crisis, reaching 19.1% at the end of the year, compared to 15.5% in 2009. The historical average is only 10.1%.

The vacancy rate is a reflection of meek office leasing activity. While there was some recovery of leasing demand last year, which increased more than 40% over the stalled market in 2020, leasing remains 41% below the pre-COVID era. The report notes that there is "no modern precedent" for this type of slowdown in leasing activity. Overall, office absorption in 2021 was -4.8 million square feet, representing 5.5% of the current inventory—which also surpasses the absorption during the Financial Crisis, when absorption represented -2.3%. It is important to note that absorption has recovered 14.3% from 2020.

The high office vacancy rate pared with the substantial sublease supply—which stands at 32.1% of the total market—could also portend significant drop in rental rates. According to Avison Young, when the ratio of sublease space to vacancy rate reaches 26%, it historically comes with a double-digit rent decline. The ratio currently stands at 23.8%. Currently, office rents have only fallen 4.1% since 2020 and 1.9% from 2019, illustrating return-to-work strategies are in play.