These Corporations Are Making an attempt to Shed Huge Quantities of San Francisco Workplace Area
As San Francisco struggles to get below its highest-ever office vacancy rate, a sluggish sublease market is playing an increasing role in the city’s commercial real estate crash.
San Francisco has the largest sublease market of any US metro area, with 7.2% of its total office stock available for sublease, and that number has doubled since the end of 2019.
Phoenix is the only market coming close to SF’s sublease dominance, now ranking second in the country with 5.7% of its inventory in sublets.
“San Francisco’s large concentration of technology-related industries and hybrid work opportunities have shrunk demand for rental space and led to increased availability of subleases,” said Erwin Abidog, director of research at Cresa, a real estate brokerage firm that specializes in representing tenants looking for space throughout the country.
In fact, Salesforce, Airbnb, Meta, Dropbox, and Uber are the companies with the largest amount of subleasable space in the San Francisco market. Data from Cresa shows that some of this space has been listed since 2019, but a large chunk has just been listed: More than 1 million square feet of subleased offices came on the market in the most recent quarter.
In all, the largest subleases in the city, held by 13 companies, cover 3.5 million square feet of office space.
With 9.6 million square feet now available, SF has more sublease inventory than ever before, even in the aftermath of the dot-com crash and the Great Recession, according to Cresa. And that number has remained fairly constant throughout the pandemic.
Since availability reached current levels in early 2021, subleasable space has accounted for around 10% of the total office market in San Francisco, while an increasing amount of direct lease space continues to accumulate.
Unfortunately, the result is that sublet space isn’t flying off the shelves. Quarterly transactions have been stuck in the 200,000 square foot range since mid-2022. One reason is that Cresa’s data shows that the size of each sublease transaction is decreasing, averaging about 7,600 square feet in the first quarter.
Today, the commercial real estate market in San Francisco is plagued by large amounts of negative “net absorption” – the gap between the space let and the space put on the market quarterly.
The bottom line? Both direct and sublease space simply isn’t moving as fast as new space is being placed in the SF market.
In addition, many of the current subleases in San Francisco will expire in the next three years. An additional 4 million square feet of space will become available by the end of 2025, prompting real estate analysts to express concern about the development of one of the city’s leading industries.
The problem with supply and demand
One reason is that the total supply of SF market inventory has grown by more than 4 million square feet during the pandemic. This means there is still more brand new space in the city to compete with sublease opportunities that may not be as fresh anymore.
A recognizable trend is the “flight to quality”, since tenants are offered a selection buffet when the vacancy rate is rising sharply. This means businesses will be drawn to transit hubs and places with more amenities and prime premium buildings.
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“Given the current value of real estate, in many cases you can both save costs and improve the quality of your premises,” said Cresa Managing Director Janna Luce. “And tenants are taking advantage of this opportunity.”
The dramatic increase in supply coupled with today’s relative lack of demand is causing prices to fall.
“There are still ‘trophy’ properties like the Transamerica Pyramid that tenants will spend a lot of money on, but there’s significant downward pressure on prices for everything else,” says Erwin Abidog.
And with so many subleases available, tenants sometimes take up less space than is being offered, further driving prices down and reducing the money options for the original landlord.
Sublease availability and pricing throughout San Francisco
As of late March, sublease rates citywide were $55 per square foot, compared to about $74 to $75 per square foot for direct leases, Abidog said.
Citywide, subleases in Mission Bay fetched the highest price at $67.74 per square foot, and those in Union Square were the lowest at $38.65.
Cresa data shows that by far the most sublease space is in the Financial District, with 56 million square feet currently available, and net absorption is -1.2 million square feet for the south end of downtown.
While the situation is worst in San Francisco, Abidog sees evidence that commercial real estate problems are spreading across the Bay Area.
“Even relatively better-performing markets in Silicon Valley and the East Bay are beginning to show cracks,” says Abidog.
Maryann Jones Thompson can be reached at [email protected]
