Office Sublease Space Demand Quiet in San Francisco

In 2020, San Francisco recorded a record increase in sublease supply, ultimately accounting for more than half of the total office vacancy in the market, according to research from Cushman & Wakefield. “Unfortunately, as supply surged, demand went in the opposite direction.”

“We have recorded an uptick in tenants in the market. Pre-pandemic there were 6.5 million square feet of tenants actively searching for space then technically falling to just over 3 million square feet, although even those searches were on pause. The figure has since recovered, now standing at a moderately robust 4.5 million square feet with active tours underway,” Robert Sammons, senior director of research for Northern California and Northwest at Cushman & Wakefield, tells GlobeSt.com.

Some of this activity has started to recover as lockdowns end in California and vaccine distribution increases. “The overall market has been very quiet due in large part to the lockdown that is just now beginning to ease,” says Sammons. “We are also aware that some tenants who did put space on the sublease market have already done so or are considering pulling it offline as they now feel the economy is re-opening and that in the near-term they will need an office presence again.”

Sublease space is poised to attract the demand over direct office lease space. “Sublease space is certainly priced at a discount to direct space with the sublease asking rent going into 2021 at $67.59 per square foot on average with the direct asking rent at $80.09 price per square foot,” says Sammons, adding that he expects that quality, built-out space that is move-in ready and has a long-term left on the lease will go first.

Despite some signs of reprieve, the turmoil in the local office market is far from over. “Sublease vacancy is expected to climb further in the first and second quarters of this year as tenants work through their space needs in San Francisco and across their portfolios no matter the location,” says Sammons. “Any further increase in 2021 is expected to be partially mitigated by an increase in leasing activity.”

Office demand could also be permanently changed by the pandemic. Questions around workplace strategy and office usage make it difficult to predict how the market will recover. “As we approach a more complete economic recovery, there is a reassessment underway among all companies on what the workplace will look like,” says Sammons. “Will there be a significantly larger work-from-anywhere contingent? How much space will the company need and where should it be? And how will it be designed? The post-pandemic world will likely bring on new concepts of working with a more agile workforce but one that requires companies to continue to occupy office space.”