Sublease Growth Tapers

San Francisco, Sublease, CBRE, Fitbit Inc, Charles Schwab & Co, Cushman & Wakefield, Bay Area, JLL, East Bay, Central Valley, Cresa Corporate Real Estate

San Francisco, Sublease, CBRE, Fitbit Inc, Charles Schwab & Co, Cushman & Wakefield, Bay Area, JLL, East Bay, Central Valley, Cresa Corporate Real Estate

What the industry sees as a tell-tale sign of market slowing down is showing signs of tapering off.

THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JULY OF 2016

By David Goll

[dropcap]O[/dropcap]ffice space available for sublease has continued to grow in San Francisco, but at a more modest pace than late 2015 and early 2016. It suggests the possibility of a “tech wreck” predicted by some observers doesn’t appear likely in the immediate future.

More than 2.2 million square feet of office space was available for sublease citywide this spring , according to both Amber Schiada, vice president, director of research for Jones Lang LaSalle’s Northern California division, and Colin Yasukochi, director of research and analysis for CBRE Group Inc. That’s up from about 2 million square feet in March, according to Yasukochi, noting the increase from October 2015 to March was from 1 million to 2 million square feet.

[contextly_sidebar id=”yEsaT4UHmw5uhnyyFmKp7L739gG4GQ3z”]Technology companies make up the majority of businesses subleasing space, accounting for about half the amount, Schiada said. Among the largest recent sublease deals was Fitbit Inc. taking more than 300,000 square feet formerly occupied by Charles Schwab & Co. Inc. at 215 Fremont St. Fitbit creates wearable, wireless technology to aid in fitness activities.

An earlier report from Cushman & Wakefield showed the 1.3 million square feet of space available for sublease in the third quarter of 2015 grew to 1.7 million square feet by the fourth quarter and 1.9 million square feet by February. To put it in context, however, while that rapid acceleration in subleasing raised alarms from some in the real estate industry, the recent growth in space available for sublease is still dwarfed by the historic high of nearly 9 million square feet of sublease space in San Francisco during the 2001 dot-com bubble burst, according to JLL.

In moderation, the current trend can even be a good thing, said J.D. Lumpkin, executive managing director in the downtown San Francisco office of Cushman & Wakefield. Lumpkin said as long as the sublease space statistics remain on the modest side, the growth in such space is actually a positive development for the city’s economy.

“No question a trend is occurring here,” Lumpkin said. “But the market overall is softening and correcting, not collapsing. It’s sort of deflating the tires a bit. My spin on it is that we could really use some of it, though not too much.”

Lumpkin said San Francisco’s overheated real estate market is causing an “unsustainable, unhealthy market” where companies are increasingly seeking to move eastward seeking less-expensive space in the East Bay, Central Valley—or out of state altogether.

“When businesses have layoffs or shed space, it allows for talent and space to become available for other growing companies,” he said. “These are Series B, C and D [funding] stage companies seeking solutions to get to the other side. Subleasing space can help make it possible for them to do that.”

The cost of building out new space runs between $130 and $140 per square foot, according to a JLL report. It also stated that average asking lease rates for office space citywide was more than $72 per square foot annually.

“Sublease space may be the best deal on the market right now for some tenants needing to expand their physical footprint in San Francisco,” the report said.

Christina Clark, senior vice president in the San Francisco office of Cresa Corporate Real Estate, said her company tours both sublease and direct-space options with potential clients these days.

“There is enough out there for companies to consider both,” Clark said. “The tech companies, especially the younger ones, still want flexibility in terms of space and the length of leases.”

Even tech firms will seek direct space with longer-term leases for their headquarters, but initially favor subleased space, she said.

Those same firms and industry observers are also monitoring outside forces that can influence real estate decisions. CBRE’s Yasukochi connected the local real estate market to the stock market, noting the latter’s rocky, unpredictable start to 2016 was mirrored in companies’ skittishness about being saddled with pricey and unnecessary space.

“Now that the stock market has stabilized, it’s not the huge concern it was during the first quarter of the year,” he said. “There’s less nervousness about the stock market melting down. But what we’re seeing now is a wait-and-see attitude among companies on real estate. It always takes the [real estate] market a bit longer to react to conditions.”

Another development to keep track of, Yasukochi said, is the slowdown in venture capital backing of tech firms, especially those needing funding booster shots later this year.

JLL’s Schiada agrees that is worthy of concern, though she said her research reveals VCs in 2016 are just as interested as ever in funding the next big thing—the tech industry innovation that will change the world, as Apple Inc.’s iPhone did in 2007. That can create winners and losers in the real estate market, too.

“They still want to invest in innovative ideas,” she said, noting they are looking at companies the caliber of Tesla and Amazon, among others, for cutting-edge products or services. “It’s true they will not fund more of the same. Some companies will have to figure out how to be profitable.”

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