By Meghan Hall
Office leasing activity throughout the city of San Francisco has all but stopped, with most companies putting any big commercial real estate decisions on hold. Those who do elect to transact are doing so out of necessity. According to San Francisco leasing comps by Transwestern and Kidder Mathews, the largest leases during the second quarter were mostly renewals and San Francisco now has more than 19 million square feet on the market, up from 10 million square feet at the end of 2019.
“We’re still in a wait and see mood; tenants don’t really know how to move forward with their space requirements,” explained Patrick McKenzie, a research analyst at Avison Young, who issued a second quarter market overview of its own, separate from the leasing comps obtained by this news organization. “A lot of the top leases of the second quarter were either subleases or renewals, very little new direct deals. I think that goes to show that everyone is waiting to see how the market is going to play out…”
According to both Avison Young’s second-quarter San Francisco office leasing report, as well as Transwestern’s, the top lease of the quarter was Morgan Lewis’ renewal of its 153,323 square foot space at 1 Market Street. The Class A asset is located in the South Financial District and is owned by Paramount Group. The lease was signed—and started—on April 1st of this year and will expire at the end of March 2026. Starting rent per square foot came in at $105, with a three percent increase expected annually.
First Republic Bank decision to renew for its space—totaling 110,745 square feet—was also one of the larger deals of the quarter, according to Avison Young’s report. Located at 388 Market, the property is positioned in the North Financial District.
Woodruff, Sawyer and Company also renewed for its 43,194 square foot space, based on Transwestern’s data. The renewal began this month and will last through August of 2030. Its office is located at 50 California St. in the Financial District and is owned by MetLife Real Estate Investments. The company’s starting rent is $83 per square foot, while its effective rent is $95.15 per square foot.
At the beginning of April, eSurance also recommitted to its space at 55-75 Broadway, otherwise known as Building 3, Embarcadero Square. Owned by The Blackstone Group, eSurance recommitted to its 27,840 square foot space, and its lease is expected to roll in June of 2025. eSurance will be paying a base rent of $93 per square foot and has procured three months of free rent, according to Kidder Mathews.
By comparison, the largest new direct lease in San Francisco during the second quarter was UserTesting’s decision to lease 144 Townsend. The usability and human insight platform has leased the full Class B office building at a starting rate of $80 per square foot. Six months of free rent was also included in the deal. The lease will begin in September of this year and expire in August 2025.
The next largest lease in size was Constellation Brands, which signed a lease for 26,914 square feet at Vanbarton Group’s 101 Mission Street. Base rent for the property came in at $117 per square foot, with six months of free rent. The lease term began in May of this year and will run for 126 months, through October of 2030.
Not far behind in size was a lease was from Sitecore, which agreed to lease 24,907 square feet of space at 101 California Street. The 1.2 million square foot, Class A building is owned by GIC Real Estate. The 36-month lease includes one free month of rent, and the starting rent is $71.50 per square foot triple net, with the effective rent coming in at $96.24 per square foot. Sitecore’s lease commenced in August, with an anticipated expiration of July 2023.
Two subleases—FrontApp’s agreement to take 48,835 square feet at 1455 Market, and Airtable’s decision to take 48,812 square feet at 155 5th—also are among the largest transactions over the past several months. Avison Young did not disclose lease terms or rates.
Vacancy rates have climbed from just below five percent at the end of 2019 to eight percent during the second quarter. According to McKenzie, around two million square feet of the top 25 largest sublease spaces that have hit the market are from tech tenants, and nearly 50,000 square feet of sublease space has hit the market on a weekly basis.
The leasing comps highlight that for now, landlords are maintaining their pricing, offering concessions if necessary before considering lowering rates. Rents registered a slight decrease, coming in at $89.91 per square foot full service, on average. Class B rents are currently sitting at about $80.92 per square foot, full service, a 0.8 percent decrease, states Avison Young. Landlords are waiting to adjust rates until they are better able to predict demand within the market.
“The quick answer is that landlords really haven’t dropped their rates yet, and justifiably so, because they don’t have any data points to do so,” stated Avison Young Principal and Managing Director Nick Slonek. “The volume of transactions is way down, and its mostly just forced renewals, people who have to renew their leases, that have to do something.”
Slonek and McKenzie noted that at least for now, there is some movement in the market, and companies are beginning to explore their options. Both experts predict that if transaction volume remains slow, landlords may begin increasing concessions and re-evaluating rents at the end of 2020, or in the first quarter of 2021. Until then, it is a waiting game.