Cresa: Should Tenants be Fooled by Landlord Optimism?

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Everyone is talking about it. The impacts of COVID-19 on our economy have been far reaching with no industry left out, though some are bouncing back quickly. Residential real estate, for example, has seen a boom with interest rates at all-time lows and people looking to be more comfortable while stuck at home. The office market has, understandably, gone the other way, as companies reconsider the size of their office footprint due to the surge in operating a remote workforce. They realize this might be a sustainable future, so why pay for excess real estate? 

The San Francisco office market has been one of the hardest hit in the country. Nearly 70 percent fewer transactions were completed in 2020 vs. the prior year, putting San Francisco far behind the velocity it once enjoyed. Historically, San Francisco had market fundamentals that fueled a quick rebound, but even the most optimistic projections suggest that landlords should be concerned. Is it fair to say that with only 7.3M square feet of direct vacancy in a market with 82.7M square feet – things could be worse? Maybe so. In years past, total vacancy (direct plus sublease) did not exceed 8.5 percent. Today, direct vacancy alone records 8.8 percent. This represents more than a 4 percent increase YoY on a direct basis. Current direct vacancy would be manageable if nothing else changed. The problem is, the current market landscape is about to create more vulnerability for landlords and consequently, opportunity for tenants. 

With an additional 1/3 (2.1M square feet) of marketed sublease space expiring by the end of 2022, the reality for landlords is that there will be nearly 9.5M square feet of direct space sitting vacant in two years. At that rate, direct vacancy would hit 11.5 percent in the direct market. Typically, tenants look for space 1-2 years ahead of their lease expiration, so smart landlords should be treating the 2022 market as if it’s the current reality. Basic supply and demand economics suggest an even steeper vacancy cliff is coming and tenants should be encouraged by the coming market shift. Meaning, tenants are the ones who should be optimistic. 

What is Cresa seeing? 

  • Expanded concession packages are an early sign that landlords are open to stretching. 
  • Vacancies have increased and will continue to increase as sublease spaces turn direct in the next 24 months, with 2.1M square feet of sublease space set to expire by the end of 2022. 
  • Even the most optimistic absorption scenarios will not backfill Covid vacancies to justify 2019 rents any time soon. 
  • Companies desire to return to the office to maintain culture and engagement despite the convenience of video conferencing technologies. 
  • Tenants with lease expirations over the next three years should weigh their options and expect landlords to compete.


With landlords and tenants looking at the market from very different perspectives, let’s look at what the numbers have to say. 

San Francisco recorded 5.8M square feet of negative absorption in 2020, undoing all positive absorption accumulated in 2018 and 2019 combined. Specifically, direct absorption took a nosedive as leasing activity declined. Direct vacant square footage increased 76.1 percent YoY, and sublease vacant square footage increased 219.2 percent YoY. 

Total vacancy in San Francisco doubled, from 6.1 percent at the end of 2019 to 12.7 percent by the end of 2020. Surges in vacancy can be mostly attributed to tenants who have vacated their spaces. Tenants are playing a wait-and-see approach as the best time to return to the office is unclear. 

Leasing Activity 

Tenants added 6.6M square feet of sublease space to market in 2020 alone, bringing the amount of sublease space to 8.7M square feet. To put things in perspective, sublease availability over the last five years averaged 1.9M square feet. 

The total number of deals completed in 2020 recorded a 66.3 percent decrease compared to 2019. Direct deals recorded a 67.2 percent decrease, down to 239 from 728. In terms of square feet, direct deals recorded a 77.5 percent decrease, down to 1.9M square feet from 8.4M square feet. 

While some landlords speculate that a portion of the sublease inventory will be reoccupied, many larger blocks of space will not be. Larger tenants were land banking during the previous tight market. With ample current vacancy and changes in workplace strategies to accommodate varying degrees of agile work, most tenants no longer need to carry this type of expensive “insurance” to protect their growth. 

YoY direct availability increased 4.9M square feet (70.3 percent), while YoY sublet availability increased 6.6M square feet (149.0 percent). That’s staggering. So, what needs to happen to get back to pre-pandemic availability levels? To offset the 11.5M square feet surplus, the entire Salesforce Tower building would need to be transacted eight times over. Facebook (755K square feet at 250 Howard) or DropBox (736K square feet at 1800 Owens) would need to lease 15 times more space than they did in 2019. Pinterest would need to take 23 times (488.5K square feet) the space they had at Bluxome Street. 

Those statistics alone should be daunting to landlords, but when combined with the current headlines its down-right alarming. 

San Francisco is already seeing a shift in demand as tenants look to rethink space from their current physical footprints. With historically low vacancy and substantial demand for office space, San Francisco has been considered the most expensive office market nationally. 

Companies locate here for the superior work force and culture of innovation, and that remains intact. The question is, can occupiers leverage the current market to keep their space options open? If so, it’s a great time to be a tenant. 

Cresa is the world’s only global commercial real estate advisory firm that exclusively represents occupiers and specializes in the delivery of fully integrated real estate solutions. Our purpose is to think beyond space, strengthening those we serve and enhancing the quality of life for our clients. Delivered across every industry, with over 1000 employees in more than 80 offices globally, Cresa partners with occupiers everywhere. For more information, please visit 

For Inquiries:
Andrew McShea, Senior Research Analyst | amcshea /at/ 415.394.1024 
Craig Zodikoff, Managing Principal | czodikoff /at/ 

Articles published in our Contributor section do not necessarily represent the views of The Registry or Mighty Dot Media, Inc. They represent a selection of topics chosen for the value of their editorial perspective. We welcome feedback and alternative positions on topics, and we will consider publishing those, as well.

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