Experts: Leasing Volume Proves to be Most Important Evidence of San Francisco Office Recovery

Savills, CBRE, San Francisco, Segment, Waymo, Pinterest, Chime, Amplitude
Courtesy of Kevin Lanceplaine

By Meghan Hall

As one of the most urban markets in the country, the San Francisco office market felt outsized impacts as a result of the COVID-19 pandemic. Recovery these past 18 months has been long awaited, but the third quarter of 2021 indicated several increasingly consistent trends that could mean the office market is finally trending in the right direction. Most important among these, according to recent reports by both CBRE and Savills, is leasing volume.

 “Overall, the San Francisco Bay Area office market is still feeling the effects of the past 19 months of the pandemic,” explained Savills San Francisco Research Manager Christophe Haeberlin. “Sublease space remains high, rents are still in price discovery mode, and many companies are keeping employees at home until the end of the year or early 2022. Firms across all industries are still experimenting to find the right way to bring employees back to the office and see what works.”

Currently, the San Francisco office market has about 83 million square feet of office space, and the current availability rate sits at 26.2 percent according to Savills. CBRE listed the availability rate as 26.8 percent, with available space totaling 22.9 million square feet. This represents a decline of about 40 basis points, according to CBRE. 

However, the metric that experts have their eyes on is leasing volume, which provides an indication of how companies will not only use space in the future, but how much of it they may need. CBRE and Savills note that the metric provides a starting point when evaluating the market, and that other fundamentals are also dependent on its direction.

“Office leasing activity is the most important fundamental because demand had declined by an abnormally large amount once the pandemic started (-67 percent in 2020 versus 2019). Leasing activity is up 36 percent through Q3 2021 vs the same time period in 2020,” said Colin Yasukochi, executive director of CBRE’s Tech Insights Center. “The return of leasing activity will bring the market back to a more normal condition for landlords and tenants, and more clear trends will emerge on the direction of other fundamentals such as vacancy and rental rates.”

The third quarter of 2021 was the second consecutive quarter that San Francisco recorded more than one million square feet of leasing volume. CBRE and Savills state that more than two million square feet of space was leased during the third quarter, a substantial increase over Q2. A number of leases closed; Chime took up new space in the financial district, while Pinterest renewed for 84,355 square feet at 651 Brannan in the South of Market neighborhood. Segment, a digital analytics company, took just over 75,000 square feet in the Financial District, while Amplitude leased 57,530 square feet at 201 Third Street. Both leases were new agreements. Waymo also expanded, leasing 48,818 square feet at 555 Market. Savills notes that six of 10 major transactions were for new locations, and the technology sector in particular accounted for 84.8 percent of notable leases in San Francisco.

CBRE’s Yasukochi emphasized that the leases do represent positive momentum in the market, but that friction still remains.

“The 204,000 square foot Chime expansion at 101 California represents that the tech industry continues to thrive and expand in San Francisco,” stated Yasukochi. “On the other end, the 206,000 square foot Blackrock renewal at 400 Howard represents a 40 percent decline in space. We are still having a push and pull in the market that will continue to evolve in 2022 as office-based businesses start to have their workforces return and better assess their space needs.”

Savills notes that companies are outlooking for space and that market activity is increasing. San Francisco, despite its recent struggles, is still seen as a key location for companies.

“Leasing activity during Q3 was the largest volume since the pandemic started and trends around pre-COVID levels, clearly showing some pent-up demand, particularly for those companies with lease expirations in late 2021 and early 2022,” noted Haeberlin. “That indicates that businesses still have an appetite for space in San Francisco and are willing to sign leases, especially as things begin to settle.”

 Both Yasukochi and Haeberlin believe that recovery heading into 2022 will not necessarily be linear. While great strides have been made in preventing and treating coronavirus, concerns about the Delta variant have prompted a number of companies to push their return-to-office timelines back to 2022.

“The San Francisco office market tends to follow New York City by about six to nine months, so we’re hoping to see some of the excitement and activity in early 2022 that NYC is currently experiencing,” said Haeberlin. “It’s challenging to predict how things will evolve until the market truly opens and people go back to the office. With all of the work-from-home experiences and influences over the last two years, we anticipate that it will likely be a gradual return to anything resembling pre-COVID market dynamics and occupancy rates.”

As the market recovers and companies continue to lease space, opportunities will emerge for tenants. Because the market is still in “price discovery mode,” landlords will compete for tenants, and tenants will seek to get the best deals. Sublease blocks, in the short-term, are likely toffer rare discounts.

Yasukochi added, “I believe the majority of excess supply is currently on the market and expect 2022 to be a transition year where more balanced conditions will emerge. Tenants will have good space choices, and the increased leasing activity will likely create more competition among landlords. This could lead to some further declines in rent or rise in tenant incentives and ultimately help clear more direct and sublease space.”

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