San Francisco. Photo by Lili Popper via Unsplash.com
With demand plummeting in 2020, San Francisco could be ranked as one of the slowest office markets in the country in the short-term, if not the hardest. While the basics leave little room for comfort, there is certainly more to be said about the future than meets the eye.
Fair enough, a year after the COVID-19 pandemic, the eagle-eyed vision seems clear. “Lease demand fell more than 70 percent in 2020 as most office rental companies adopted a work-from-home strategy,” said Mark Christierson, executive vice president of CBRE, to Commercial Property Executive.
The fate and darkness of the San Francisco office market were underscored by the relocation of tech heavyweights and plans for a more permanent remote work culture, increasing vacancy rates for both out-of-the-box and sublet space.
In February, the vacancy rate in San Francisco was 12.8 percent, 550 basis points above the previous year’s figure. The subway had more than 11.3 million square feet of immediately available space and nearly 7 million square feet was listed for sublet, CommercialEdge data shows.
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Despite the rising vacancy rate, Peter Conte, senior vice president of the Transwestern office in San Francisco, argued that the subway has always been one of the most dynamic cities with “faster booms and busts than the average market” and therefore needs to recover faster. He also pointed out that while there is an abundance of sublet space on the market, this is also an opportunity for startup groups to expand and use newly available space.
On the way to recovery
Image by Michael Gaida via Pixabay.com
According to a recent study by Newmark, the availability of sublet space in San Francisco has even seen a slight decrease in the last few months compared to the fourth quarter of 2020. Some sublet space has most likely been listed speculatively, mostly by tech companies wanting to cover rental costs rather than expecting long-term footprint shrinking. In addition, some of this sublet space will be withdrawn from the market, the researchers found.
As vaccination campaigns increase, office users are becoming increasingly optimistic and resorting to the idea of returning to the office. “The demand for offices is increasing. Slowly but surely, the vaccine and the realization that normality was just around the corner sparked the demand for FAANG (Facebook, Amazon, Apple, Netflix and Google). With FAANG’s request comes the “security” for others to initiate projects, “said Nick Slonek, Principal & Managing Director at Avison Young’s San Francisco office.
Slonek also pointed out that the Bay Area saw office inquiries rise by more than 60 percent in 2021. “Tour activity has increased by over 30 percent and supply activity by over 40 percent compared to the previous year,” he added.
Office demand in San Francisco rebounded nearly 95 percent from its mid-2020 low, according to VTS’s Office Demand Index report, which tracks tenant interest based on office tours by prospective tenants. This could lead to increased leasing activity in the coming quarters and bring the Bay Area office market closer to recovery.
Who’s Renting in San Francisco Now?
Jeffrey Rogers, president of Briggs Development, a company that develops and manages office buildings in the Bay Area, noted that leasing activity across the Briggs portfolio has increased as companies have more confidence in their needs beyond the pandemic. “As the pandemic progressed, we evacuated some tenants after their leases expired, but we were delighted to see new tenants have rental space with more rental calls going on,” he said.
Currently, the most active tenants in the market are professional service and life science companies and their affiliates. According to Conte, these companies are “usually looking for flexible, large and open-format rooms with multiple use zones that cannot be replicated from the home office and that can be used for their business needs in the future,” says Conte.
Image by Michal Jarmoluk via Pixabay.com
Indeed, the type of space and its location will be critical to the success of office buildings in the future. The latest record $ 1.1 billion sale on The Exchange on the 16th, a 750,000 square meter office property in the Mission Bay neighborhood of San Francisco, exemplifies the future needs of office owners and tenants. The LEED Platinum certified building serves as Dropbox’s headquarters. However, the tech company had a permanent remote working strategy and offered half of the building for sublet.
Vir Biotechnology sublet nearly 13,000 square feet of space at The Exchange on the 16th, which is roughly a third of the space Dropbox put on the market. Last week, Dropbox confirmed that BridgeBio – a drug development company – had signed another 52,604 square foot lease, marking the property’s second biotech deal, the San Francisco Chronicle reported.
ALSO READ: The transformation of the life science industry
In the meantime, tenants of professional services mostly renew themselves, usually at a cheaper price, or try to take advantage of current market conditions by either lowering their occupancy costs or taking the opportunity for a flight to quality, Slonek said.
Slonek expected leasing activities for technology companies to increase in the second half of the year. Currently, these tenants are “using pre-built CapEx transactions to aid their expansion in order to postpone important decisions for a while longer,” he added.
Still, the Bay Area should slowly get back into shape in the third and fourth quarters of 2021. “We assume that demand and gross rental activity will return to the ‘normal’ average by 2022,” said Slonek. “Once data points hit the market on a regular basis, both landlords and tenants can feel better about making important decisions. Until then, we will continue to see sporadic activity among professional service and technology companies, ”he concluded.