'There's No Bifurcating The Illness': San Francisco Rents Dive As Sublease, Vacancies Climb

A once-humming San Francisco office market stalled by the coronavirus pandemic regressed further in Q3, posting close to a million SF of available sublease space and a more than 4% drop in average asking rent.

S.F. came into 2020 with 1M SF of office sublease inventory and a 4.5% vacancy rate but has seen those figures rise to 3.6M SF and 10.1%, respectively, according to Colliers International. Its average annual asking rents fell 4.2% in Q3 to $75.98 per SF after coming into this year at $81.18 per SF, according to Savills.

That marks a demand freefall found in almost all major markets, but which is more extreme in S.F. because of factors specific to the city, including its high pre-pandemic costs, remote work-friendly tech sector and reliance on mass transit, experts say. Even so, the drop isn't as extreme as it may seem, according to Colliers International Senior Research Manager Erin Proto.

"It's been so tight over the last few years that that seems shocking, but it's really kind of not that bad when you look at it," Proto said of the rise in sublease space and overall vacancy rate.

Most major markets in normal circumstances see vacancy rates around 10%, according to Proto and Glenn Gilmore, president of Brick & Timber Collective, a S.F. office developer and owner. And 10% was precisely the U.S. average heading into this year, according to Colliers data.

The amount of sublease space may also be misleading, according to Gilmore. "There's a lot of opportunistic sublease space out there, and when the pandemic ends, a lot of companies will pull that space off the market," he said.

Nevertheless, both Proto and Gillmore said that until the pandemic ends or there is a more certain timeline, deals and absorption in S.F. will remain slowed. Even beyond the pandemic, longer-term space needs in S.F. are an open question, Proto said.

"I think there's still a lot of uncertainty as to how companies are going to address this going forward, even after the pandemic is over," she said.

Amid the pandemic, some of the city's biggest office tenants have adopted remote work plans that go well into next year. Facebook CEO Mark Zuckerberg said earlier this year that half the company's workforce could be remote as early as 2025. Twitter, meanwhile, has listed over 100K SF of its headquarters for sublease after announcing a remote work policy of its own. 

New leasing activity has also plummeted, falling to 300K SF total in Q3, compared to 2.6M SF seen in Q3 2019, according to Savills. This year, only one lease above 50K SF was signed in Q3: OpenAI for about 97K SF at 575 Florida St. in the Mission District.

Many in San Francisco's office sector say they are still confident demand will start to rebound when the pandemic subsides.

"[Companies] are concerned about recruitment and retention once people go back into the office if they don't have a desirable office for people to go to," Transwestern Senior Vice President Gabe Chao, who specializes in tenant advisory, told Bisnow.

But with remote work an option and the pandemic still presenting uncertainty for the time being, many companies will continue putting off significant real estate deals, Gillmore said.

Experts also cite mass transit as being an additional barrier to office re-occupancy, especially in markets like S.F. that are heavily reliant on it. In the Bay Area, 15.5% of workers use public transit, second to only New York City in the country, according to data compiled by Transit. 

"There's no bifurcating the illness with demand in San Francisco, which is true of every major metropolitan market, but especially in San Francisco," Gillmore said. "Until we have some clarity on the health situation, we're going to be in a bit of a freefall from a demand perspective."