Would A Recession Be A CRE Fire Sale For San Francisco?

A recession would be a golden buying opportunity for commercial real estate players looking to snap up prime San Francisco real estate at bargain prices, two principals at Cresa told Bisnow Wednesday.

“If occupiers contract, there would be more vacancy and finally some relief in the market,” said Christina Clark, managing principal at Cresa, which bills itself as the world’s largest tenant-only commercial real estate firm.

“With an increase in supply, Bay Area-based companies may see the recession as an opportunity to acquire additional space at a competitive price,” she said. "Acquiring this prime space should enhance recruitment and overall business growth for those companies.” 

That buying climate would still apply to East Bay and other satellite submarkets in the nine-county Bay Area, but would come with some caveats the farther away from urban areas buyers choose to go. Access to transit, Class-A space and the cultural infrastructure needed to attract top talent will also be major components in how “recession-proof” an area may be.

“Generally, markets with higher vacancy rates and limited access to public transportation are hardest hit during a recession. If these markets struggle to attract large-block occupiers in today’s environment, a recession would pose an even greater challenge,” Cresa Managing Principal Jamie Saunders said.

The opportunity to score high-value properties in one of the world’s most expensive markets could become even bigger because of how ubiquitous coworking operators are in the city.

Coworking occupies between 5% and 7% of the total San Francisco CBD office inventory, according to data from Cresa. The segment is expected to grow exponentially bigger this year — and ink more tenants next to the city’s Big Tech cohorts.

In San Francisco, several well-known tech companies such as Google (1.6M+ SF), Facebook (1.2M SF) and Salesforce (2M+ SF) have large footprints, taking up sizeable blocks of space in buildings they have purchased or leased long term and where they have invested significant capital.

Coworking companies are following suit, with WeWork in over 1M SF and Knotel targeting 1M SF in San Francisco by year-end, Clark said. If some tenants fail or decide to shrink their footprint, or large tech companies move from owned space into coworking, a contraction could put lots of unique properties on the market.  

“There are now several large tech companies such as Google, Amazon, Microsoft, Facebook and Salesforce occupying large blocks of space in the Bay Area,” Saunders said. “Their presence has strengthened since the last two recessions, and they are joined by coworking providers who also occupy a significant amount of square footage in the area. The rise of coworking presents a flexible option for many occupiers who may be reluctant to assume a long-term lease.” 

With recent major buys, like WeWork’s purchase of 600 California St., and Knotel’s citywide expansion, Clark and Saunders said a downturn could signal stellar buying conditions for newly vacated space. It could also push more traditional, marquee companies into coworking solutions that allow them to keep a market presence while trimming overhead.

“We always advise our clients to maintain as much flexibility with their real estate as possible, whether for growth or contraction. When designing a space, consider: what if you had to expand or contract and sublease part of it, is there a place to demise? Take the time during lease negotiation to consider expansion, subleasing and termination clauses,” Saunders said.

Still, even in a cash-strapped downturn, the metro San Francisco market is going to be pricey. They cautioned that even companies eyeing possible budgeting restrictions should view coworking as an option, not a panacea. 

“Coworking is a viable option in a recession, but not one that comes without considerations,” Clark said. “Occupiers should evaluate balancing cost per head or square foot vs. use of capital, the impact of coworking on company culture and the stability of coworking providers.

“While coworking spaces provide flexibility, occupiers need to consider long-term spend to initial outlay, the pros and cons of being in a coworking space, and carefully structure sound agreements that provide protection in a recession. This is especially true for big-block occupiers.”