Report: San Francisco Office Subleases Dip in Q3 But Remain at Historic Highs

Bay Area Council return to work employers San Francisco Metropolitan Transportation Commission EMC Research

By Vladimir Bosanac

A lot has been said recently about various plans that companies have about returning to work, and a wide array of approaches has been suggested by employers trying to gauge the best way forward. While most of that information is anecdotal, the proof in the pudding has been the sublease space these companies have put back on the market. According to recent (April and July 2021) San Francisco Market Snapshot reports from Newmark, that figure was at 9 million square feet in April of 2021, representing around 10.4 percent of the market, and in July that fell to 8 million square feet, or roughly 9.3 percent of the market.

While that may seem encouraging for the market, we continue to learn more about the COVID-19 virus and how our behavior cultivates its ability to transform and prolong the pandemic. As a result, comparing the two reports helps understand the trends affecting commercial real estate in the future.

One of the trends identified in the Newmark reports is that the size of subleases is beginning to increase. In April, nine new subleases were added to the market totaling 386,805 square feet. Zillow had posted the largest one at 105,897 square feet, Cruise’s space was second largest at 82,830 square feet, while Earnest put back 60,192 square feet. In July, however, seven new subleases hit the market totaling 571,229 square feet. Of those seven, Airbnb’s 294,966 square feet was the largest amount offered, while Coinbase, the second largest one, gave up 170,999 and Orange another 27,639 square feet.

Since March of 2021, when the company began its tracker, 168 net new subleases became available totaling 5.3 million square feet of space.

Some bright spots in the report indicate that the velocity with which that sublease space has been taken is beginning to increase. Since the low point, which came in the fourth quarter of 2020, the first and second quarters of this year have seen a steady increase of leasing volume. On top of that, 18 companies received funding in excess of $50 million just in July, indicating that the steady flow of innovation will continue to shape the industry in the quarters ahead. On all fronts indicating market activity, which include inquiries for space, tours, proposals submitted, signed LOIs and completed deals, Newmark is tracking increases, which bodes well for the industry overall.

On top of that, direct availability from landlords has begun to decrease slightly. In April, availability in excess of 10,000 square feet totaled 807,486 square feet across 18 properties. In July, a total of 306,468 square feet spread over 14 properties came available on the market.

In July, some notable leases included Pinterest renewing its 98,129 square foot headquarters lease at 651 Brannan, Hinge Health leasing 86,000 square feet at 455 Market and Mission Barns taking the 32,421 square foot lab space at 1155 Bryant.

Citing anecdotal evidence, Newmark stated that trophy spaces are in short supply with asking rates around $120 per square foot. No qualifying data was provided for that statement, and previous reporting by The Registry indicated that even prior to the pandemic this asking rate was difficult to obtain. 

Current tenant demand in the market is hovering around 6.3 million square feet, according to the July report, which Newmark points out is above the 2015-2019 five-year average of 6.1 million square feet. However, this demand was not broken down by type of demand, which would provide additional clarity on renewals and expansion plans.

And while San Francisco has maintained one of the highest vaccination rates in the country, Newmark’s report does acknowledge that the delta variant of the virus may push many corporate openings further out in the year.

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