San Francisco Office Market Turns into Nightmare, in Two Easy Steps. Step 1: Hogging Office Space; Step 2: Working from Home

Step 3: The economy… but that step hasn’t happened yet.

By Wolf Richter for WOLF STREET.

San Francisco had been the hottest office market in the US in 2019, when the office vacancy rate was just 7.1%, when tech and social media companies and all kinds of startups piled all over each other, leasing office space they didn’t need and couldn’t use to prepare for a future that wouldn’t come.

Now, Q1, 2023: The vacancy rate is 32.7%. Nearly one-third of San Francisco’s office space was on the market for lease, an all-time record, according to Savills. And all the trends are going in the wrong direction. During the worst year of the Dotcom Bust, in 2003, the vacancy rate topped out at 18%.

The vacancy rates in Q1 ranged from 28% in the South of Market Area (SOMA) to 55.4% in the Yerba Buena area.

Of the 86.6 million square feet (msf) of total office space, over 28 msf are vacant and on the market. This includes a record 8.9 msf of sublease space, up from 7.7 msf a year ago.

This type of pileup of sublease space is rough. This is when companies, such as Meta, realize that they will never move into the space that they leased years ago for a future that didn’t come, and that are then trying to find a tenant for the remaining years of the lease to help them defray the carrying costs. They tend to undercut landlords trying to directly lease their own vacant space because the objective of a sublease isn’t profit, but lowering carrying costs.

Meta said in January that it plans to list for sublease its 435,000-sf office at 181 Fremont Street.

Salesforce, the City’s largest tech employer, put another 125,000 sf on the sublease market in March, this time at the Salesforce Tower, which is owned by Boston Properties. This brings Salesforce’s total sublease space to over 1 million sf.

I mean, what were these people thinking when they leased this space? These big tech companies that think they will grow forever have big real estate departments, headed by highly-paid executives with titles such as VP of Global Real Estate, whose job is campus-building and office-leasing, and that’s what they did, and that’s what they ended up with.

The first big defaults — because of interest rates. PIMCO’s Columbia Property Trust defaulted on two office towers in downtown: 201 California Street and 650 California Street. The latter is where Twitter leased the 30th floor, and then after Musk took over, just stopped paying rent, according to a lawsuit filed in December by Columbia. In theory, Twitter is on the hook for the lease until January 31, 2025.

One problem behind the default is the floating-rate mortgage note. Columbia took out the floating-rate mortgage in December 2021. I mean, what were these people thinking? This was the time when inflation was spiking and the Fed was tapering QE and warning about rate hikes, and these morons, perhaps entrenched in the camp of the pivot mongers, blew off the Fed, and got a floating-rate note at 3%, and by early 2023, it had doubled to 6%. OK, game over – which is where the talks begin.

The company said it’s in discussion with the lenders to restructure the mortgage. Lenders don’t want the towers under any circumstances. Defaulting on the mortgage of office towers in this market is like putting a gun to their heads. And they’ll talk.

But this time, it’s not yet the economy, that shoe has yet to drop. This time, the primary drivers are two factors:

1. Hogging of office space in the years through 2019 to prepare for a future that wouldn’t come. As everyone was hogging office space they didn’t need, it created an office shortage that fired up the office-hogging even more. Human brains are funny about hogging, as we learned during the empty-shelves episode in the spring of 2020.

2. Working from home since the pandemic. Many employers in San Francisco have embraced it fully, others are desperately trying to bring some workers back to the office for a few days a week in hybrid fashion. But they realize that they don’t need all this space that they hogged over the past few years.

Leasing activity fizzled in Q1. Only 900,000 sf were leased, compared to 1.5 msf in Q1 2022, and 2.5 msf in Q1 2019.

The biggest transaction was Gap’s sale-leaseback of its Athletica headquarters. It sold the 162,000-sf building at 1 Harrison Street for $80 million to Sobrato Organization, and leased it back for one year. So that took no office space off the market.

The third-largest transaction was a renewal by Bank of the West. That didn’t take any office space off the market either.

The fourth-largest transaction was Reddit’s downscaling move: It’s moving out of its 78,000-sf office on Market St., which it subleased from Block, and it’s moving into 47,000 sf of space at 303 Second St. This move will put even more vacant space on the market.

Average asking rents declined further. For Class A space they dipped to $74.59 per square foot per year. This is down about 16% from the peak in 2019.

Price would normally solve demand problems in that prices drop until demand materializes. But in commercial real estate that is leveraged up to the hilt, it’s not possible for landlords to lower the rents beyond a certain point because they wouldn’t be able to pay the mortgage with lowered rents, even if they could fill the building, and language in the contract could put them into default. And so they default.

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  125 comments for “San Francisco Office Market Turns into Nightmare, in Two Easy Steps. Step 1: Hogging Office Space; Step 2: Working from Home

  1. Shiloh1 says:

    If I didn’t think I’d be a violent crime victim then I’d consider going back to a downtown Chicago office a couple of days a week.

    I’d tape $20 bills to the outside of my coat so the common thieves can help themselves with minimal drama.

    • Leo says:

      CMBS is just another’s group of crap categorized as a “Dollar denominated assets” on Corporate balance sheets.

      Real demand and supply based accounting would have caused significant devaluation of this.

      To the surprise of most tech companies, the layoffs actually worsened the office attendance!

      Fed is protecting this crap through its “slow QT” and fast bailouts!

      Wolf, we support QT. Just putting comments like this in moderation will not cause “Slow Fed Qt” to have big effects through your narratives.
      For QT to succeed and establish right narrative, Fed really has to do “Fast QT” and break unsustainable crap. JPow has failed miserably here. Even crap like bitcoin is at $28K.

    • OutWest says:

      Over time, I’ve been living in smaller towns that still have a decent job market with interesting things to do. Glad to commute less and spend less time around the office…and less time watching my back!

      • Fed Up says:

        Yes, office politics is what I can’t handle. Just let me do my friggin job. I’d be interested in knowing some of those small towns that have good job markets.

        • Implicit says:

          True that!
          Office politics is a creature within itself. Some people love that shite, and thrive on workplace drama.
          Remote is the way to go to get away from it. It will save companies money, so they will do it if it is doable.

    • Braincramp says:

      And last night they voted Brandon Johnson –arguably even worse than Lightfoot– into the Mayor’s office.

      Chicago, Seattle, Portland, and San Francisco are having a race to the bottom. My money is on Seattle with their entrenched city management. It may be too late.

    • Ted T. says:

      Unfortunately, its not going to get any better after today’s election.

    • longstreet says:

      This election result will further empty out the once great great city.
      Head tax, commuter tax, higher property tax, less police, taxing exchanges,…..
      Chicago groans like a man being tortured.

      • Blam35 says:


        You couldn’t pay me enough to be the mayor of Chicago. It’s a financially impossible city to run. I welcome the change of the guard but expecting him to reverse 60 years of poor financial stewardship is beyond possible.

        But, some new ideas isn’t the worse idea. Vallas would have been the death of the city.

    • dang says:

      That strikes me as a plea from an oppressed individual that is pleading for regress. The problem is identifying which of the identified maladies pertains.

  2. Alec says:

    I don’t see prices stopping till at least 60% down.

    • Leo says:

      The funniest part is seeing corporations run artificial reduction on buildings. Big corporations are shutting down existing buildings that they own to save on utilities and building maintenance costs. Sick with 10% attendance, they are now packing employees that are coming to offices in 10% of the buildings that they can run on higher occupancy and so save money on building shutdowns.

      This can unfortunately cause office attendance to further drop as
      1. higher occupancy will result in higher infection probability.
      2. People are not used to overpopulated buildings for few years now!

      It’s not that these corporations are planning to sell the shutdown buildings because they know that they won’t fetch any decent offers.

    • dang says:

      Kudos to UCONN, champions that vividly demonstrated at least four of the common characteristics of a champion.


      A moment in the sun that will fade like day into night.

  3. Gabe says:

    Seems pretty obvious a large percentage of this empty space will/should be converted to residential condos and the like. Supply, meet demand.

    • Doolittle says:

      Perfect, for the “homeless”!

      • Leo says:

        Most offices are made like big football fields where 1% bosses rooms javelin windows and sunlight. The other employees work in artificial lights.

        Converting them to residential will mean 90% of home will be dens without windows or sunlight. Who would want this house?

        The fact is that these buildings are useless now for foreseeable future:
        1. Malls? No, they are already dying.
        2. Residential? No windows.
        3. Warehouse? Floor hieght too low.
        4. Industry to bring manufacturing back? Floor height too low. Labor cost too high.
        5. Hospitals? Too many buildings available, too few doctors and fewer paying patients!

        • Anthony A. says:

          How about converting them to prisons? No windows needed. I’m pretty sure the country is short on prisons right now.

        • Gomp says:

          I think plumbing rehab is bigger problem than windows.

        • kramartini says:

          I live in a converted office building in downtown Austin. While it is true that there is a lot of interior space away from the windows, the floor plan is open (a loft) and thus only the bathroom completely lacks natural light. And while there is less light than in a normal home, it is much easier to keep my unit cool in 110 degree heat…

    • Wolf Richter says:


      Yes, and there are some projects in the works. But it takes years. And many office buildings cannot be converted. They’ll have to be torn down and the land has to be redeveloped into residential.

      But financially, to make this work, you really need to buy the tower out of foreclosure at a discount of 60 to 80 cents on the dollar. Then your cost base is low enough to where you can spend the money to do the work. A current landlord with that current cost base cannot do it. So the foreclosure process needs to start rolling.

      • drg1234 says:

        There was a wonderful article a couple of weeks ago in the NYT about what kinds of office buildings can be successfully converted. The accompanying floor plan graphics are among the best illustrations I’ve ever seen on the web.

        The basic issue is that every bedroom has to have an exterior window. The modern monolithic block skyscraper has too much useless interior volume. There is a creative solution in the article that creates a central courtyard, but this involves moving a structural column.

        Hundred year old buildings work. Forty year old buildings don’t.

        • Implicit says:

          Interesting points!

        • 91B20 1stCav (AUS) says:

          …those old enough will remember the ‘lofting’ movement/era in NYC back in the ’60’s/’70’s among the primarily bohemian/artist demographic (best to you, Kitten, wherever you are) in the vacated industrial areas, and, after being perceived as chic/trendy, were subsequently subverted by the dominant real-estate paradigm. (…still have a contemporary book somewhere in my stored library entitled something like ‘Pioneering in the Urban Wilderness’, an observing/how-to advice tome).

          As stated, the present situation would probably
          only work with older structures (although I recall my sister’s Hell’s Kitchen tenement having just one small window on the street side back in the ’80’s) and dangerously-relaxed codes (which, as in earlier times, still might not hinder ingenious squatters in any event…).

          may we all find a better day.

        • Flea says:

          Just leave the central column ,so simple

      • VintageVNvet says:

        Wolf: I worked many projects to a guy who’s dad arrived from middle east into SF with a quarter in his pocket and washed dishes for a couple of years while he figured out the current situation.
        ”My guy, the older son” was a VP at Bank of America, and when his dad called to say he was going soon, was truly amazed to find millions in banks in Switzerland,,, not to mention the millions in RE around the bay area.
        My guy only would buy when he could pay cash.
        Best client ever…

      • Ld says:

        Agreed, you really need to buy the tower our of foreclosure. This would help reduce your cost base and increase your work. Especially consideration to reduce landlord liability.

    • Moosy says:

      Supply meets demand but in a city with a beyond bat crazy city council, expect that they will demand it to be converted for low income housing (which prevent any income to the city) or just to shelter homeless people (which will destroy the value of the property even more)

      Also do expect bat crazy ordinances that you will need to pay a fee for keeping property unused and not offering shelter.

    • Mike Tuttle says:

      Apparently the way office buildings are constructed it is hard to convert them into residences. They floor size, elevator locations, plumbing, and probably more things mitigate against it. Unfortunately.

    • dang says:

      I think it is more existential than the next vexation.

      Trillions of dollars at risk of loss if the commercial real estate market were to collapse seems like a bell ringing at the top of the bubble about to burst.

      The Fed is not a friend of the working man, the old, trying to live on meager savings. It is a cartoon created by the member banks that own the Fed,

      The long awaited collapse of the grossly, obvious, QE over inflation in the asset markets.

      • dang says:

        The extent of it is proportional to the growth and ultimate girth of the Fed balance sheet. Reminds me of a story generally ascribed to the Dutch.

        The one about a small Dutch boy putting his tiny fingers in the dike holding back millions of cubic meters of water.

      • dang says:

        I mean, I have been waiting for the illogical application of monetary policy to be reversed for the past 15 years or so.

        I agree. It’s just a little late to cry about a tiny glass of spilt milk, when staring into a real economic dislocation in which the collateral becomes worth less than loan.

    • Robert (QSLV) says:


  4. The Bob who cried Wolf says:

    I’ve often wondered how feasible it would be to convert these office spaces to residential rental or possibly for sale condos. As much as I think people need to get back to the office I don’t see anywhere near the return to like it was before. Add to that that so many folks, as indicated in the first comment, are not too eager to go to work in these crime riddled places anymore. Unfortunately, that sentiment would likely hold true for living in these downtowns as well. I’m sort of curious how Miami office space is doing.

    • Venkarel says:

      I often wondered the same regarding the vacant shopping malls that are popping up everywhere.

      • Seba says:

        I’m currently working in a very small city on Vanvouver Island in BC Canada. The local shopping mall here has been partly converted into a rentable storage facility with lockers and all, the old big box store that was there before is now a big dollar store, another space has become a grocery store, it’s kind of a run down area now. The nice “high end” area is more of a mixed use space with nice condos and hotels overlooking the ocean/mountains, small boutique shops and restaurants on lower floors, plazas with surviving big box, grocers and drug stores nearby.

        With large office towers though it’d probably be really expensive to convert into residential, there’d be a ton of work in that and you’d have to get very creative in designing living quarters within the existing space. I’ve only ever been in one converted office tower, the suites were actually pretty cool because they were turned into lofts with high ceilings and stuff, but that was a pretty small office tower closer to the outskirts of Toronto not one of the behemoths in the DT core. Seems cheaper and more efficient to build new residential from scratch, especially if price per SQFT is high which I’d imagine it is in places like SF, then you’d want high end design and finishes to match the price.

      • Nick Kelly says:

        The comment above from DRG explains the main prob with converting office space: need for windows. With malls you have this but much worse, there aren’t any. Then comes plumbing, where at least the office building has multiple floors, so sewage can run down hill.
        In almost every case the only way to convert a mall is to demolish it.

        • VintageVNvet says:

          NAH NK:
          ANY,,, and every space CAN be converted!
          As I told many many client/customers, residential and commercial, in my 50+ years in construction: WE, in this case, where this started, WE the Berzerkely Corps of Engineers, can DO ANYTHING you want to your property…
          Only question was then and continues to be, $#$$$$$$???
          Many commercial buildings CAN be converted to residential well within cost of building new… others cannot… VERY simple and clear with any currently working ”master” estimator IMO, after having been that for the last decade or so before retirement…
          Many don’t want to see this is very clear.

        • dang says:

          Pretty astute statement with which I currently agree with your words, ” In almost every case the only way to convert a mall is to demolish it.”.


        • Wolf Richter says:

          Nick Kelly,

          They’re converting a big mall here in San Francisco (Stonestown). Malls have HUGE parking lots that you can turn into condo and apartment buildings. They’re putting 3,000 housing units on these parking lots. Nothing to tear down. They will also tear down or modify some box buildings and create a walkable “main street” with restaurants and retail on both sides. Malls are a parking-lot horror show, and it’s exciting to see them replaced with housing.

        • Nick Kelly says:

          Agree that parking lots offer good development space. I was replying to the comments about altering existing buildings.

        • Wolf Richter says:

          I agreed with you. I just wanted to add this concept of the parking lots. For redevelopment, that’s the most valuable space.

    • Seneca's Cliff says:

      Even if it was possible to convert these offices to condo’s, doesn’t another issue pop up. Taken to the extreme, lets say half of the office space in SF is evacuated for good but all converted of condo’s. Who is going to live in those condos? There are now half as many office jobs for people to commute to from their condos. There is an outflow of population in places like SF and PDX so incoming residents won’t fill them. Are cities going to become high rise warrens of WFH’s who type away in service of business’s located in the high desert of Idaho or Nevada? Or do they just become big dorms for people who play video games all day and get some sort of “minimum basic income” from the government. Once upon a time residential habitation followed commerce. Places like SF and NYC had big concentrations of population because they were centers of trade and commerce with natural harbors. I many people would like to believe that the internet has move us to a new era where the new population centers can be in Bozeman and Aspen because “people like it there”. But when the dust settles people will live near physical centers of commerce. Converting the office towers of San Francisco in to condos will work no better than converting the abandoned auto plants of Detroit in to housing would have if it was tried in the 70’s

      • Wolf Richter says:

        Price solves demand problems. If condo prices drop enough in San Francisco, people will move to San Francisco. What’s driving people out now are the horrendously high living expenses — especially housing.

        Then the problem is that none of these conversion projects make financial sense at the lower condo prices that would bring a large number of people into the city. All of these conversions have to be higher end, or else they don’t make financial sense.

        Same with conversions to rental apartments. They all have to be higher end to make financial sense, but that won’t bring people into the City.

        • VintageVNvet says:

          EVERYBODY everywhere want to live, or at least have a pied a terre in SF IMHO…
          Once the prices for anything reasonable become reasonable, folks from ALL OVER THE WORLD will want to buy a place in SF…
          Of course I am very ”prejudiced” because I was there in the late 1960s-early ’70s…

      • gametv says:

        Disagree. Work from home is creating the ability to live anywhere. That will mean that there is alot more land available to be built. Going to be good for home builders actually, particularly home builders that are price efficient.

        Lots of homes with the latest features will pop up and people will move there and drain the cities. Over time, this will help lead to the reduction of residential home prices on a large scale.

        During the past years many areas like Boise saw prices go wild as people moved there from California. But the availability of land will reverse this trend and prices will fall again, not back to where they once were, but down.

        When you fly over the land, you see plenty of available land. Over the next decade we will spread out and that will allow prices to deflate in many areas.

        • dang says:

          I am currently working with young engineers who have not had the benefit of the office environment to alert them that working alone, leads to a closed loop, when one runs up against the very problem, again and again.

          Collaboration, the natural state, is lost in the isolation of work from home.

          Many of us old school types met our wives at work.

    • Cem says:

      My CFO told me yesterday she doesn’t care if I go in or not. However Professor G says to go in if I want to move up the ranks so I do.

      For all the millennials/gen z out there they don’t have to go in and no one will bat an eye but they may be kneecapping their own upward mobility in the corporate world.

      • VintageVNvet says:

        Good one Cem,,,
        According to all I read, you must be very intelligent.
        Mainly because you AGREE with me SO much…LOL
        Thank you.

      • Jamey says:

        Simple – Just get another WFH job, better pay. We had to do that anyway, there’s no advancement path in corpos anymore. We’re all guns for hire now, going to the highest bidder.

      • Zest says:

        This seems to be highly situational. My whole company is permanently remote. There’s no office to go to.

        My brother goes into the office 2-3 days a week, but rarely ever sees management there. They’re gone more than he is, and they meet virtually 90% of the time anyway.

        My sister’s company has used flexible work to begin hiring employees in lower-cost areas across the country. The company has significantly downsized office space since so few are going in with regularity.

        Another brother has no office to go to. His wife has worked remotely for years, and has no office. Both have had success in climbing the ladder at the rate they desire.

        Finally, my partner recently left a job where few employees are going in regularly, and when they do, all meetings are held on zoom anyway. They question the value of going in at all, except to have time and space away from spouses and kids.

        These are just a few anecdotes. But it’s enough to show me that many companies are adapting. Not all, but many. You can prove your worth for promotion as a remote employee, but it takes a slightly different approach than the old office days.

    • longstreet says:

      Converting brick and mortar to condo and apartment clusters…..with restaurants close by, is a sport where I live.

  5. American Dream says:

    Crazy how moronic these C suite clowns can be.

    If it wasn’t for all the blow and hookers maybe they could have foreseen this coming.

    Another example of how just because someone has a prestigious job doesn’t mean they’re better then anyone else or even good at what they do.

    They just get paid more

    • Sporkfed says:

      A lot of incompetent people are promoted to get them out of the way.
      Eventually they reach a level where they can do real harm. Then they are paid well to leave. Meanwhile, the worker who is competent is held back because management doesn’t want to create problems for themselves.

      • NYguy says:

        Government in a nut shell.

        I would guess at least 25% of publicly listed software companies will be bankrupt inside of 5 years. Buh bye to all that projected cloud growth, ad revenue, and AI enabled CRM garbage.

        • Fed up says:

          In government, it’s called screw up and move up. No accountability and a promotion. I’ve seen it way too much in my career.

          Meanwhile I laughed hysterically at Wolf’s example above, “One problem behind the default is the floating-rate mortgage note. Columbia took out the floating-rate mortgage in December 2021.”

          Like Wolf said, either a moron or high on pivot hopium.

      • Dave Kunkel says:

        See the Peter Principle: People get promoted to their level of incompetence.

    • Doolittle says:

      Shareholder thieves they are.

  6. Bs ini says:

    And the end game is similar to houston which had empty office towers for a couple of decades

  7. Degobah Smith says:

    From where I sit, massive destruction of wealth – both real and paper – is the only route back to something resembling normal. As Wolf and others have said for years, there is simply way too much cheap money destroying one of the basic functions of capitalism – wealth (capital) should be directed to its most efficient use.

    We have friends who think nothing of paying $60 for one small roasted chicken (sides extra) at a new “chi-chi” restaurant here, and there’s a shop opening up in a prime location on our main shopping street that sells toast. Yeah, just toast.

    Alas, the government in its infinite wisdom seems bent on preventing, or at least slowing, this necessary correction (ala 2009) with bailouts, etc., to prevent the inevitable recession. I say let ‘er rip and the chips fall where they may. It’s the only way out of this mess.

    • phleep says:

      The “government in its infinite wisdom,” IMO, has an infinite fear, financial contagion. This goes from the banks (big emergency increases in bank bailout guarantees, this last month) to street-level (pandemic PPP loans and stimmie payments). It has good reasons for this fear: things can go zero-sum in a day (as bank run tremor showed), maybe straight to social disorder (in a country now full of competitive self-fancied tough guys who are largely armed). Government may try to induce everyone to make nice and have a healthy balance sheet, but it is hamstrung in a free-speech country riddled with consumer addictions (and the loud everyday drumbeat of the lobby of the beneficiaries of that). Government’s one “break the glass” last ditch basic tool is the bailout, and we are (maybe) at the endgame of that already. The kindling has built up, so the “necessary correction” can take on brush fire/contagion/public emergency dynamics in a day, the very thing the gov was trying to stave off. Good luck to us all!

      • Flea says:

        Ostriches pull your head out of the sand,biggest banks in world collapsing,cre is f****d ,gold and oil increasing . Massive layoffs ,except no one saying anything about 10 small businesses closing a day .My prediction by late summer SHTF

    • Jon W says:

      I think it’s a bit disingenuous to equate a fancy chicken restaurant to bad investments. It’s speaks nothing of whether the business is actually able to make a decent profit (they probably are). Movies don’t do anything useful, but I doubt you’d argue that we should shutdown the film industry.

      Much of our economy is built on services that are not necessities. If someone can build a business selling toast that is profitable, then good for them – there is obviously demand for such a product. You might not like that product, which is fine – don’t spend your money there.

      Bad investment is not things like this. Bad investment is when you open the toast store, run it at a huge loss for five years, then IPO it for millions on the basis that you’re going to start using blockchain. This is bad investment and what needs to be cleaned out of our economy. By definition, a business that can remain profitable from cashflow (which is basically any restaurant that survives) is not a bad investment. It may not be the best investment, but that’s the owners prerogative.

      FWIW, fancy toast shops are quite common in Singapore/Malaysia.

      • Degobah Smith says:

        John W –

        I agree with your points about bad investments. If you build it and they come, then kudos to you.

        My beef is that ordinary people have so much extra, unearned, rentier money – from stimuli, asset/home price inflation, etc. – that they think nothing of $60 chickens and toast shops. I should have articulated that more clearly.

        Thanks for the heads-up about toast shops in the far east, I had no idea. Cheers.

        • Longtime Listner says:

          The fed spent years throwing cheap money at banks, banks that gave it to businesses, business who did not make money, but made extensive plans to grow, and you’re angry about a 60 dollar chicken?

          No, you get off my lawn!

    • Bobber says:

      “Alas, the government in its infinite wisdom seems bent on preventing, or at least slowing, this necessary correction (ala 2009) with bailouts, etc., to prevent the inevitable recession. ”

      That is correct, and as each day passes, the system becomes more dependent on stimulus, which is really just a palliative. Smart people have been warning about the core problems for a decade or more, yet here we are, victims of a spineless short-sighted monetary policy.

      The modest recession they were trying to avoid has now turned into a potential systematic collapse.

  8. grimp says:

    Will the FED/Treasury stand back and let nature take its course should the grim reaper knock on CRE’s door or intervene and kick the can further down the road?

  9. Bobber says:

    You really can’t say these companies are foolish. If a competitor wants to carve out more market share, free money gives them the power to do it. They’ll hire like crazy and get the necessary office space. Rational competitors have to follow along or they’ll lose market share, which is hard to regain once lost.

    It’s the monetary authorities that screwed up.

    • phleep says:

      Competition invites more hasty decisions, which turn out in hindsight to be mal-investment. I recall (then-) Citi CEO Chuck Prince, talking to the Financial Times in 2007: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Citi of course had built up huge off-balance-sheet entities processing things like subprime home mortgages, an inventory (like commercial RE now) that became an anchor dragging them down. Oops. Alas, we are one huge turn of the screw later in any cycle, and we have not backpedalled timely or intelligently. The go-go competitive-cheap money cycle was prolonged into the end of 2019, and thereafter re-started into the end of 2021. The amount of wrong-footedness is hopefully contained (I cringe because Bernanke used that word for subprime, pre-’08 crash), but may turn out to be epic. We are, IMO, and despite the stock market’s signals, sailing down a very narrow path between Scylla and Charybdis. Rubini says we’ll get both: a stagflationary crisis.

      • Bobber says:

        I cannot argue with predictions of stagflation. A lot of wealthy people have retired early and left the economy, so a lot of productive capacity has been lost. Many of these people were heavy lifters. They aren’t producing anymore, but they still need to buy things.

        That development leads to stagflation, which will linger over a long period, as people continue to retire early, based on the mirage of free wealth. The only way the Fed can avoid stagflation is to reduce the asset prices that are causing it.

        Further, the problem is multifarious. Artificial stimulation, when not removed, destroys economic growth AND social fabric. A lot of people out there are economically challenged, anxious and disgusted.

        • Harrold says:

          Unemployment is still very low. Stagflation isn’t happening.

        • Bobber says:

          Harold, you can’t look at the unemployment rate, which is artificially reduced by people who retired early, based on artificial asset prices.

          Look at the relationship of real GDP growth to inflation. We have low real GDP growth and high inflation. That’s stagflation.

          Also, there is modest stagflation despite the money supply being 50% higher than two years ago and government deficits being $1.5T to $2T. What does that tell you? It means we are only seeing the tip of the stagflation iceberg. If/when stimulus reduces, stagflation will get worse.

          The only way out is to reduce asset prices across the board by taking out stimulus at a healthy pace.

          It’s like jumping from a moving train. If you jump early, you have a higher chance of avoiding injury. If you wait, it gets tougher and tougher, then impossible.

        • Harrold says:

          That’s not the definition of stagflation.

          You should coin a new term for high inflation, low GDP growth, and low unemployment.

          Maybe Anti-Phillips Curve?

        • Wolf Richter says:


          I think the term for this that people kicked around here was Bidenflation.

  10. polistra says:

    Why was Facebook renting physical buildings? Legless virtual ghosts don’t need floor space. They can float around anywhere.

  11. BuySome says:

    Sounds like a whole load of wasted steel out there. Oh, well. If this ‘lectronic nightmare entirely short circuits one day, the world’s gonna be needing steam locomotives again. At least there’ll be plenty-o scrap metal to send to the furnace. Jetson’s future my ass. They’ll have to go backwards five spaces to move forward one.

  12. Pro-Establishment says:

    Ya’ll are over-worried. Yellen/FDIC/FED just sent a very clear message by bailing out depositors and banks that no one will get harmed by these temporary trends.

    We all need to support these great tech companies.

    They aren’t using all their office space yet, but just be patient, they will.

  13. My Name is August West says:

    I have heard that something like 85% of NYC office space is unable to be converted to residential. Not sure where I heard that, maybe from WB, or maybe a WSJ article. Anyway, no one ever explains WHY these office buildings can not be converted to residential? The only things I can think of are that the load-bearing walls are in the middle of the floorplans and that would make it hard to renovate into apartments (but that does not make sense since these office suites are customized to the lessors’ desired floor plans). Or, the only other thing I can think of is the water pipes. If the office buildings are built with water pipes only going up and down so that all restrooms are above and below each other, and no pipes go side to side under the floors, you could not just put apartments in there because there would be no water to the bathrooms and kitchens. That’s really all I can think of, but I never heard a real explanation of why so many office buildings can not be converted to residential.

    • Harrold says:

      A lot is cost. Its often much cheaper to build new than it is to convert an existing building. Heck, they stopped putting in windows that can open about 50 years ago.

    • VintageVNvet says:

      Harold is correct regarding the windows challenges.
      Other than that, all the pipes and ducts and so on CAN be re-arranged fairly cheaply…
      OF course the windows can be,,, and most likely SHOULD BE changed,,, as we have seen clearly lately when many ”fixed” windows have been blown out by less than hurricane force winds in many places…
      Gotta be an entirely anecdotal/individual analysis of each and every building…

  14. Seneca's Cliff says:

    Sometimes the old ways are best. In the PDX metro area town I live in almost all the office space ( except for a Salesforce Tower sitting in the middle of a field) is hooked to factories. The people in the offices have to do stuff in the factories so they need to be there. While some of them did WFH during Covid they quickly transitioned back to a desk near the factory after it was over because it makes sense. I think to some degree we are paying the price for thinking we can base our economy on people in offices shuffling paper, posting cat videos, selling digital adds and spying on people. Once the dust settles on the last 40 years we will have to go back to making things, and growing things and holding the rest of it to a bare minimum.

  15. Frank says:

    With this trend in SF and other cities, appears that REITs will take a hit, at least those focused on the commercial market.

  16. polecat says:

    BEHOLD Yee lovely future Ruins..

    ..with *life finding its way inside All Those Office Spaces.

    *everything non-human, that is.

  17. Cassandro says:

    No surprise about SF real estate. Sheep following other sheep over the cliff. Lemmings, not thought leaders. And the pain hasn’t really become as evident as it will be yet. The whole Bay Area is in the early phases of a massive economic earthquake, where the early tremors hint of a much more extreme shake soon to come. So it’s not just the abyss facing commercial properties. It’s also individuals who are locked into extremely high priced housing, a deteriorating social network, declining govt :(BART and CALTRAIN), and a society that thinks that this economic malaise is just a short term bad dream that will soon fade away. It is difficult to know just how bad this collapse will be and for how long!

    • Bobber says:

      Good point. A lot of people are thinking “things have to change”. But the Fed is thinking “soft landing”, which is really just more Chinese water torture inflicted on the masses.

      What happens when things don’t change?

    • VintageVNvet says:

      ”It is difficult to know just how bad this collapse will be and for how long!”
      Not only difficult Cass, but actually impossible.
      Other than that clear lack of clarity, all other predictions are just opinions,, or worse, just attempts to coerce/convince WE the PEEDONs to be THE SUCKERS in the crash that is SO clearly coming…

  18. Anthony says:

    Who owns all the debt on the Commercial Rental market?

    • Wolf Richter says:

      CMBS holders (bond funds, pension funds, other institutional investors), banks, life insurers, pension funds, etc. About 38% is held by banks, spread over thousands of banks.

      • Seen it all before, Bob says:


        Sorry, I had asked the same question below.

        I hope the devastation is spread over a wide area to minimize the damage.

  19. Xavier Caveat says:

    Who would have guessed the rapture would happen in SF, but were there clumps of clothing and shoes on the ground where the employees used to be?

  20. Monkee says:

    How much of this space is being used as collateral against loans which will become more expensive to maintain as interest rates remain high? Leading to default and a sort of 1st housing bubble cascade situation?

  21. Venkarel says:

    This is off thread, but is the financing period for new cars really 72 to 84 months now? Not that I am in the market but holy %^#*! we need a buyers strike.

    • Wolf Richter says:

      up to. Yes.

      But new vehicles today last longer and look good much longer than they used to. So a seven-year-old vehicle with 120,000 miles on it is still in great shape. So from that perspective, I’m OK with it.

      • Bourbon Baron says:

        Leasing is outrrrrrrageous, just like financing being hilariously ugly. On the latter you either have 50% markups on MSRP, or cute fees tacked on, like floormat enhancement fee, and blinker fluid filtration fee. On a leasing side, dealers are demanding big skrilla down, limit you to 7,500 smiles and good luck turning that sucker in post-lease without any penalties like a bug splattered on your windshield. Wahooooo!!!

        Since I am a glutton for punishment German style, I drive an ’08 E70 with a V8 motor. It’s less of a bankruptcy on wheels a Jetco CVT transmission in a Nissan.

        • 91B20 1stCav (AUS) says:

          BBaron – ‘blinker fluid’ gave me a smile, and ‘filtration’ a howl. Apropos ‘fluid’, only, my first intro to it was in the service dept. at the moto shop back in the ’80’s when the proud new owner of a nearly-immaculate ’70’s UJM asked us to check his turn indicators as one was only “half-full” (I kid you not). At some point, the lens and gasket had separated slightly on one of them, presumably allowing washwater ingress. The owner took a bit of convincing, even though we drained dried and resealed the offending blinker, that breaking good seals on the other three to prove they were dry wasn’t a good longterm strategy (unless he wanted to start purchasing ‘blinker fluid service’…).

          It wasn’t the last time we encountered this situation…

          may we all find a better day.

      • BuySome says:

        Henry Youngman is still alive? Now headlining Vegas with car jokes? “Take my automobile…please!”. This routine still cracks me up.

      • longstreet says:

        What is a 7 year old Tesla worth?

        • Massbytes says:

          Lots of variables, but I see one listing of a 2016 Model S 90D, 44K miles at 40K.

        • ru82 says:

          That made me look on carguru. Here is the price history of a 2018 Model S with 46k miles that a dealer has been trying to sell since last August.

          3/10/2023 $32,995
          1/17/2023 $34,995
          12/29/2022 $37,775
          12/27/2022 $37,995
          12/1/2022 $39,775
          11/19/2022 $41,775
          11/1/2022 $41,995
          9/30/2022 $44,995
          9/8/2022 $45,995
          8/16/2022 $47,995

        • ru82 says:

          Here is a Model Y 2021 AWD.

          3/21/2023 $49,995
          3/6/2023 $50,995
          2/20/2023 $51,995
          2/3/2023 $57,995
          1/30/2023 $59,995
          1/11/2023 $62,995
          1/3/2023 $63,995
          12/27/2022 $64,995
          12/21/2022 $65,995
          12/6/2022 $63,995

        • Wolf Richter says:

          Yeah, that’s what you get when the manufacturer (Tesla) cuts prices on NEW models by something like 4% to 9%. This worked out to cuts of $6,000 to $8,000 on many models. Overnight, it drags down the entire used-vehicle lineup.

    • Nick Kelly says:

      The last new auto finance ad I saw was for just under 5%, like .1 percent under. A big difference from a year ago.

  22. Prairie Rider says:

    In yesterday’s local business news headline:
    ‘AT&T leaving namesake downtown Minneapolis tower for suburban facility.’

    “At a time when more workers are returning to their downtown offices, AT&T’s employees are moving out of its namesake tower in Minneapolis.
    The telecommunications company said it’s moving all operations currently done in the 34-story building at 901 Marquette AV., to a facility about 10 miles south in Bloomington.”

    “The move will be completed by the end of August, allowing us to use our office space more effectively. It’s important to note that these jobs will remain in the greater Minneapolis area, and we remain committed to Minnesota.”

    This tower was built in 1991, and AT&T now leases 95,000 square feet of space in it. It is 80% leased according to the owners. Minneapolis has a 25% vacancy rate as of Q1 in 2023.

    AT&T is getting out of the city center, and I think that it is a wise move.

    “It’s been in the works for quite a few months,” said Steve Cramer, CEO of the Minneapolis Downtown Council. “It’s not great news, but I can understand it.”

    AT&T will be saving money with the move.

    • Wolf Richter says:

      The vacant, 1.4 msf former AT&T tower in downtown St. Louis sold for $4.1 million in May 2022. In 2006, it had sold for $205 million. Can’t lose money in real estate. The $107 million in debt on the building was held by bondholders.

      • Prairie Rider says:

        Wow. Those numbers are staggering.

      • Anon1970 says:

        St. Louis has one of the highest homicide rates per 100,000 population in the country. Lots of money has been lost in inner city real estate over the past sixty years. In 2022, St. Louis had a homicide rate of about 68 per 100,000 population vs about 7 per 100,000 in San Francisco.

  23. MF says:

    “these morons, perhaps entrenched in the camp of the pivot mongers, blew off the Fed…”

    Nobody ever lost their job following the herd even when — especially when — the herd is delusional. If you want to get punished harshly and then ostracized, try deconstructing a group’s consensual hallucination to their faces. You’ll get pilloried.

    Don’t believe me? Search job postings for VP’s in facilities management and real estate. Look at what the expectations are. They’re not looking for contrarians.

  24. rbblum says:

    With the San Francisco woes in the office space sector shouldn’t the Millennium Tower residents push for a deal to swap out their sinking residential space for office space that could be transitioned to residential space ? The remaining office vacancies could go to the street people (at taxpayer expense).

  25. kramartini says:

    Cities are no longer centers of commerce, but playgrounds for rich singles…until law and order breaks down…

  26. cresus says:

    One thing I’ve noticed in the biggest market (Manhattan) is that despite high rates of vacancies they are still unleashed pharaonic projects all over the place. Talk about wrong timing . And the arrogance of those class A buildings where the amount of space, high ceilings, exquisite common areas and break zones are all 7 stars, reeks of excess to me. I can see it all from my terrace at night when they leave the offices with all lights on…What a waste. In a way I welcome a serious office downturn to stop destroying the skyline, and break the hubris. Build decent stuff for the middle class instead.

    • Wolf Richter says:

      Yes, they’ve done this in Houston too. Houston has had a vacancy rate of over 30% for years – much worse than Manhattan now. And yet they built lots of huge towers with the latest and greatest amenities (granted, many of them were planned before the 2015 oil bust), and they’re filling up as there is a flight to quality, with companies leaving their 1980s towers when the lease expires. It’s the 1980s towers that end up vacant and in foreclosure sales, not the new ones.

  27. Seen it all before, Bob says:

    Who holds the loans for commercial RE? Banks? Public/Private investment groups (ie PIMCO)? tradeable commercial REITs?

    Unlike home mortgages, I am fairly sure that the GSE’s don’t hold the mortgages.

    Is this the next government bailout?

    Oops, we saved the US from a repeat of the massive bank bailouts for home foreclosures by moving loans to the GSE’s but now we have a commercial RE crisis?

    • Seen it all before, Bob says:

      Sorry, Answered by Wolf above.

    • Wolf Richter says:

      Banks hold about 38% of all CRE debt. So that’s about $1.9 trillion spread over several thousand banks. The rest is spread across investors. The Fed holds about $8 billion of multifamily CMBS. Multifamily is the largest segment of CRE. Office is smaller.

  28. My name is August West says:

    My impression is that crime and grime have absolutely no impact on most people in terms of selecting where to live or work. If it really did as much as some people claim it does, most of the top 25 cities for population would be lowest population/sq mile instead of top. Everyone likes to talk about the cities dying, but they’re not really dying. Lots of poor people and lots of very wealthy people. Middle class people are often aspirational and they want to live and work in the cities too.
    If ever there was a case for everybody picking up and just leaving, it is today’s SF, and yet most of the people are not leaving. Most are staying. Some left, makes for interesting news, but most are staying and happy to be there.
    Wake me up when one of these big cities really does die; I’ll be resting over here comfortably while I wait.

    • wchuckw says:

      I agree. I live just north of downtown Chicago in River North. For all the media scare I still see tower cranes out our windows; pretty much every day since we moved in 2016. If Chicago were really that bad developers would have stopped building years ago. Businesses aren’t leaving because of crime, as WR has been stating brick and mortar is dying and landlords won’t/can’t lower rent. In Seattle now for the kid’s spring break and for all the scare media here we’re having a great, albeit slightly wet, time.

  29. RickV says:

    In the early 90s I audited the builder of a Los Angeles suburb. It was half built and crashed with the earlies 90s recession. High construction loan interest rates and no buyers. Building had come to a standstill. The bank I worked for at the time was a joint venture partner with the builder (I didn’t know a bank could be a joint venture partner) and hence had the right to audit. The builder was very gracious to me and I found no wrongdoing. I remember the sign he hung on his office door. “God, please let there be another housing boom, and I promise not to screw it up again.” The development has since been completed and includes a number of Hollywood A-listers (whatever that means). Its name is Hidden Hills.

  30. eg says:

    C’est dommage!

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