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Green Shoots Emerge In S.F.’s Office Market, But It’s Darkest Before Dawn

A report from Newmark shows that tech-centered metros had elevated growth in sublease availability during 2020, but none more than San Francisco, which experienced a tripling of sublets hitting the market.

Although the near term shows a further uptick in idle offices, indicators are manifesting for market strengthening later this year.

“It's interesting that during Covid, the two previously most robust office markets — New York City and San Francisco — both experienced a surge of sublease availability,” Newmark West Region Research Managing Director Garrick Brown said.

S.F. went from one of the lowest vacancy levels in the city’s history at 3.2% at the end of 2019 to 12.4% in 2020 — a level that didn’t entirely eclipse the vacancy surge in 2001 during the tech crash, Garrick said, adding that Q1 2021 numbers are expected to creep up even more but that it will “probably be the low-water mark.”

Of 15 urban areas tracked by the report, S.F. had the greatest sublease space as a percentage of total office availabilities in Q4 2020 at 52.6%. The next two urban areas with the highest proportions were Seattle and Manhattan, with 31.7% and 29.3%, respectively. 


Data from CBRE shows that S.F.’s office market has yet to improve. February 2021 vacancy was 18.6%, up from 16.9% at the end of Q4 2020. Office availability was 24.3%, up from 20.7%. Nearly 430K SF of office sublets were added in February.

Elevated sublease availabilities are a crucial factor in the U.S. office market’s recovery. Near-term uncertainty still looms as companies formulate space needs and coronavirus vaccinations have yet to reach a critical mass.

But Brown is optimistic about the prevailing message he has heard from CEOs: Flexible workplace options will ultimately prevail over predominant work-from-home policies. Even if many companies end up downsizing total square footage, the downward pressure on rents will likely trigger a flurry of activity once pandemic-related factors ease.

"We're looking at it from the point of view that the market is like a train going through a valley,” Brown said. “The vacancy numbers, the sublease numbers are going to be worse with our first-quarter numbers — that’s the caboose. The front end of it, the engine — that's driving things, that's where we're seeing a significant pick up on a weekly basis that continues to accelerate.”

Part of the acceleration is in green shoots, or early indicators of economic recovery, such as prospective tenants expressing interest, touring properties and issuing letters of intent to lease.

"The amount of touring our brokers have done, for example, in February had doubled what they were seeing in December,” Brown said. “And these numbers are going up considerably week by week.”

Another factor is that over the past 20 years, venture capital funding activity has tended to spark demand in tech-centric markets. Following a previous record in 2019 when $47.5B in venture capital was raised in the U.S., 2020 stands out as an anomaly because a subsequent record of $123.2B was raised during the pandemic-induced downturn, Brown said, adding that year-to-date 2021 fundraising of $58.6B could mean a sharp spike in activity during the second half of the year.

“Our basic forecast is a significant ramp-up of leasing activity, a lot of it funded by VC — and this will start to kick in and impact our numbers the final half of this year, with rents stabilizing during that time and rebounding,” Brown said.