The amount of commercial real estate under construction in San Francisco has slowed to its lowest level in 10 years.
As of the second quarter of 2024, a combined total of 5.8 million square feet of industrial, retail and office space was underway, while 3,400 apartment units were under construction in the multifamily sector. While the region's total amount of construction has fallen — in part thanks to technological advances driving economic activity into the digital world — the contrasting fortunes of different property sectors reinforce technology's dramatic impact on demand for commercial real estate.
The retail sector was the first to feel the impact of this activity shift, as online shopping took market share away from physical stores. Nationally, annual retail construction is around one-third of its 2008 peak. In San Francisco, retail is the smallest construction sector, and less than 150,000 square feet of new space is currently underway.
More recently, the office sector has faced disruption from the technological changes that allow office work to be performed outside of traditional physical office spaces. In contrast to the retail sector, where the shift in demand for retail space has played out over a longer period, the decrease in demand for office space was jolted into action by the COVID-19 pandemic.
San Francisco felt the impact of this working transition more than any other U.S. city, triggering a sharp drop in construction activity. Only 1.4 million square feet of office space is currently under construction in San Francisco, a significant decline from the 10 million square feet underway at the peak of the last boom in 2017.
By contrast, San Francisco's industrial sector is the main beneficiary of the shift from physical to digital. The digital economy needs infrastructure, computing power and distribution systems. Digital infrastructure — which includes fiber optic cable networks, cell phone towers and data centers — has seen growing investor interest as its economic importance increases.
In addition, the logistics segment has expanded as retailers and logistics companies build out their distribution networks to support next-day delivery across all manner of online consumer goods retailing. As a result, the industrial sector has enjoyed strong gains in rents and values over recent years and has seen the highest amount of new construction.
Unlike commercial real estate, demand in the residential sector remains largely insulated from the broader technological changes. Construction activity in San Francisco’s multifamily sector has stayed robust over the past five years despite a large drop in the city’s population. While the number of units under construction has fallen in recent months, it remains close to the longer-term average.
The changes to consumer behavior and working patterns have happened quickly, and the slow-moving world of real estate will require more time to adjust fully. Accordingly, changes in use, obsolescence and new construction will continue to play out for many coming years.
