San Francisco’s Office Market Shows Signs of Movement Even as Slews of Subleases Hit the Market

San Francisco, Newmark, Uber, Yelp, Pier 70, Mission Bay, Postmates, Docusign, WeWork, CBRE
Courtesy of Eduardo Santos

By Meghan Hall

With a vaccine on the horizon and a belief in the vitality of downtown urban cores, many had high hopes for San Francisco’s office market heading into the new year. However, the first two months of 2021 have produced just as many questions about the city’s future as a number of high-profile subleases have hit the market in recent weeks. As companies continue to give up space, industry experts are watching San Francisco office fundamentals carefully while wondering if more companies will continue to follow suit.

“The whole fourth quarter [of 2020] was slow, but we are seeing things pick up again.” explained Newmark Research Director Andrea Arata. “But obviously with the say at home orders still in effect, we’re not going to see major changes until they are lifted and people can go back into the office.”

At the end of January, San Francisco had 8.4 million square feet of sublease space on the market—about 9.8 percent of total inventory. 233 different spaces greater than 10,000 square feet were available, and the average size of the leases are about 33,734 square feet. The average lease term is about 44 months. Just a year ago, there were about 70 such availabilities on the market, with an average size of 38,359 square feet and an average remaining lease term of 30 months.

Since March of 2020, 147 net new subleases have become available, an increase of more than 188 percent, and more than 4.7 million square feet of space has become available. In January, 11 new subleases were added and three subleases grew, adding more than 408,000 square feet of sublease space to the market. The majority of these subleases have been greater than 10,000 square feet.

In January, Docusign listed 58,883 square feet for sublease, while Postmates listed 57,530 square feet of space. WeWork also posted 51,242 square feet of space. In a couple of smaller availabilities, CBRE has listed 14,172 square feet of space for sublease, and Calypso Technologies has decided to place 14,983 square feet on the market.

Looking ahead into 2021, the amount of sublease space in San Francisco’s market is still expected to grow, especially as a number of major companies have decided to give up space in recent weeks. 

At the beginning of February, Yelp listed its entire headquarters at 140 Montgomery for lease. Yelp occupied 161,876 square feet in the 26-story building. Its lease was originally set to expire in October of 2021. About a week later, Uber began marketing a large chunk—around 300,000 square feet of space— of its new Mission Bay Campus for lease. The company also listed its Pier 70 space, which totals 131,000 square feet, for sublease. Marketing materials indicate the building is available through April of 2028.

A number of direct availabilities were also listed: 44,482 square feet became available at 595 Market, while more than 87,000 square feet became available at 300 Mission. Roughly 16,000 square feet also became available at 50 and 101 California each. 

With so much space hitting the market, vacancy could continue to trend upwards on par with the 2001 and 2008 vacancy spikes caused by previous market corrections. Rental rates are likely to bottom during the second half of 2021. At the end of last year, rents came in at just under $80 per square foot. According to Newmark, how rents will fluctuate really depends on the building, the quality of space and activity in the market.

There is, however, some movement in the market. Goldman Sachs recently signed up to take 84,000 square feet at 555 California. In a smaller lease, Varo inked a lease for just under 25,000  square feet at 100  Montgomery. Wedbush, an investment firm, has leased 14,574 square feet at 600 Montgomery, while Engine No. 1, another investment firm, has leased 12,600 square feet at 710 Sansome. 

Arata also noted that the San Francisco market will reach a sweet spot, where office space can be found for a more reasonable price. The companies who jump back into the market first will likely be the biggest beneficiaries.

“Tenants will realize there’s cheap sublease space on the market,” said Arata. “But once everyone is looking at that same sublease space, it’s no longer cheap. So there’s some incentive for some early birds to come in and take space. They could get a bargain right now that they may not be able to get once things are opened up.”

Newmark has reported seeing increases in inquiries for space, tours and proposals in recent weeks. Signed LOIs and deals are also on the rise as tenants are feeling more comfortable about lease commitments, particularly those beginning in the latter half of 2021. Newmark is tracking 4.6 million square feet of requirements in San Francisco, up from 3.6 million square feet at the end of December. The number is still lower, however, than the  5.6 million square feet of requirements that were tracking in March of 2020, prior to the pandemic.

There are a number of other market indicators worth watching, as well. Talent remains a type priority for major companies, and San Francisco remains at the forefront of the nation’s well-educated, accessible talent pools. Additionally, Newmark believes that while work from home has made an impact, it won’t be the end-all for companies, and a physical presence will remain a key requirement.

“We’re not hearing mandatory work from home. We’re hearing optional,” said Arata. “It’s not as if tenants plan on giving up all of their space.”

19 companies headquartered in San Francisco raised over $20  million each for a total of $1.7 billion in funding. Robinhood raised $3.4 billion from investors, while Clubhouse, a social networking app, reached a $1 billion valuation. Newmark believes the inflow of investment will help companies continue to expand—even in San Francisco.

“The money didn’t disappear,” said Arata. “And the talent generally didn’t disappear…So those [reasons], right there…and because San Francisco is a fun place to be…are why people [what to be here.]”

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