Tech Companies Have Become Reluctant Landlords In San Francisco

With the city’s office vacancy rate rising steadily toward the 30% mark, downtown San Francisco finds itself with a new class of landlords: the tech companies themselves.

As the tech giants that led the Bay Area’s historic leasing run-up before the pandemic vacate offices, they find themselves serving as landlords, either through subleasing their space, or searching for tenants to take over their former space in buildings they own.

“The tech industry as a whole has almost become the largest landlord in the city, because they are subleasing so much space,” CBRE Tech Insights Center Executive Director Colin Yasukochi said. “So they have become reluctant landlords.”

The Bay Area’s total office vacancy rate is 29.4%, according to CBRE’s latest market report. 

“It’s the highest we’ve seen,” Yasukochi said.

The most recent example came this week with the revelation that Salesforce would exit one of its namesake towers, this one known as Salesforce East at 350 Mission St. The software-as-a-service company will sublease the last 104K SF of office it occupied in the building in its latest space reduction, according to The Real Deal.

In the past year, San Francisco’s largest private employer cut back on half its office space at 350 Fremont St., or Salesforce West, and put six floors in Salesforce Tower up for sublease, while Salesforce-owned Slack dumped its entire headquarters at 45 Fremont St. onto the sublease market. 

“The high vacancy rate is impacting technology companies’ ability to recover some of the costs that they continue to pay on these leases,” Yasukochi said. 

Pinterest announced last month in a regulatory filing that it would vacate office space at 505 Brannan St. and 149 Bluxome St., paying $100M in the short term while aiming to recuperate costs through subleasing agreements. 

It will join a crowded market and, like all the other companies offering space for sublease, its ability to charge market rents will depend on the desirability of its offerings. 

“If you are looking for prime space at the top of the building with spectacular views in new modern buildings, that sector of the market has actually seen rents go up because people want to upgrade their space,” Yasukochi said. 

But space on lower floors or in older buildings may have trouble keeping their rents high and may have to buckle to little demand with crowded supply. But so far, rents in San Francisco are holding steady. 

“You would have expected rents to come down a lot more than they have because after the dot-com crash, they went down 70%,” he said. 

While San Francisco has borne the brunt of the office flight, Silicon Valley, including San Jose satellite cities in Santa Clara and San Mateo counties, have not experienced the same exodus from the office.

The Silicon Valley vacancy rate is about 15.6%, according to CBRE. The number is up roughly 1.4% from the previous quarter, with much of the increase in vacancy related to Meta’s decision to offload 716K SF of office in the quarter. 

San Francisco’s vacancy rate increased by 1.8%, continuing a trend. 

“San Francisco has the highest concentration of companies that were most negatively impacted when the economy shut down,” Yasukochi said. Downtown San Francisco had more small, startup-level tech companies that tend to be more cost-conscious, he said.

“With Silicon Valley, it’s more of a long-established and large technology company environment down there,” he said.