San Francisco Sublease Market Accounts for Half of Office Vacancy

San Francisco County has one of the highest sublease markets in the country. A new report from Cushman & Wakefield analyzing sublease stock throughout the country shows San Francisco is second only to Manhattan in recording the largest square footage growth in sublease space last year, increasing a staggering 587% in 2020 compared to 2019. The supply now represents 51.8% of the overall office vacancy rate in the market.

Surprisingly, the pandemic was not the catalyst for the increase in sublease supply. The event was already in motion before the onset of the pandemic. “The initial wave of sublease space in San Francisco was due to big blocks entering the market during what was considered more pre-pandemic early in the first quarter of 2020, including Uber, in preparation for a move to its new headquarters in Mission Bay, adding space in four different properties for a total of approximately 800,000 square feet; Stripe adding 295,000 square feet in an expected move to South San Francisco; Macy’s.com relocating back East and adding 243,000 square feet; and Credit Karma adding about 150,000 square feet in its planned move to Oakland,” Robert Sammons, senior director of research in Northern California and the Northwest at Cushman & Wakefield, tells GlobeSt.com.

In early 2020, the increase in sublease supply was actually welcomed by the market, which had a limited supply of office and strong demand for quality space. “Going into 2020, there was a dearth of available space, large and small, in San Francisco with a vacancy rate of just 5.4%, the lowest of any major market in the U.S. It also had the highest average asking rent of any major market in the U.S., more so than the former perennial leader, Manhattan,” says Sammons.

At that time, the market’s limited office supply was hindering leasing activity. “We were losing companies to other markets due to that lack of space and those high price points. It was hoped that these blocks would at least partially alleviate the space issue though likely not the price point issue,” Sammons adds.

Of course, too much of a good thing is anything but. The pandemic accelerated the trend and suppressed demand, leading to soaring levels of sublease supply. “Both larger and smaller firms did not know when they would be able to reoccupy or how much space would be needed,” says Sammons. “Thus San Francisco recorded a second and even larger sublease wave, particularly in the second and third quarters of 2020. The run-up was sharp and quick, climbing to the most sublease vacancy ever recorded in San Francisco, beyond even the Dot-Com Recession in the early 2000’s.”

Overall, office leasing activity fell to the lowest levels since the early 1990s for both sublease and direct lease space. “The market essentially came to a halt except for those deals with leases expiring and tenants needing to renew at least for a short term,” says Sammons. “Because of the dearth of leasing transactions, there was very little price discovery with asking rents not recording any adjustments until mid-year 2020. Through the fourth quarter 2020 asking rents had adjusted down by almost 10.0% citywide for all classes of space since topping out at mid-year 2020.”

This trend will likely continue through 2021, but there is some silver lining. “The impact has not been nor will be the same for all buildings,” says Sammons. “The trophy properties—with amenities, parking, upgraded systems and views—are performing better during the initial phases of the recovery than commodity stock.”