As Tech Takes Its Time, Other Industries Seek Deals In S.F. Office Market
As some in the commercial real estate industry in San Francisco wait for Big Tech to pick up the slack in its office market, other industries are trickling in, capitalizing on more favorable fundamentals than the city offered potential tenants a few years ago.
“I would say where I’ve had the most success in seeing the deals get completed would be more professional services-oriented. Finance, VC, law firms, insurance, accounting groups,” Avison Young principal Kelly Glass told Bisnow.
As demand sputters slowly back to life, landlords are increasingly forced to offer incentives to get tenants to commit — albeit for shorter leases, with ever-increasing demands for flexibility and overall, less square footage leased.
“Tech is out there on the periphery and touring, but still homing in on what their ultimate return-to-office plans are, whereas these other professional services groups feel a little bit more comfortable about how they are going to utilize the space and are more active in signing deals and getting them done,” she said.
Glass doesn’t expect this shift in demand to lead any new trends in terms of where the deals are getting done, with most preferring space located in the city’s Financial District, a return to form for office leasing trends in the city.
“The big trend right now is in the migration back to the [downtown] core, where tenants had moved to some of the periphery submarkets, whether they were priced out, or the sizes they wanted weren’t available,” she said.
Average direct asking rents, which spiked over $90 per SF for Class-A in 2019, are down about 10% from that peak to $82, according to Avison Young's latest San Francisco office market report.
“It does seem that the downtown Financial District is a little more lively and more active than some of the other markets.”
Glass also notes that geographic interest varies by industry, with tech companies historically tending toward submarkets like SoMA or Mission Bay, while more traditional industries tend to prefer the stature of downtown high-rises.
Make no mistake, tech is still the dominant industry in San Francisco, and there are still some growing pains to suffer through as companies re-evaluate their need for larger spaces.
On one hand, Wells Fargo recently recommitted to another decade of leasing space at 333 Market St., keeping the 620K SF firmly a part of its long-term plans.
On the other, law firm Farella Braun + Martel LLP opted out of its prior 125K SF office, instead consolidating into a 40K SF location at 1 Bush St., according to the San Francisco Business Times earlier this month.
Tenants, looking to lower costs wherever possible, are increasingly searching for more “turnkey” solutions, leading landlords to get creative to get deals done and compete with the growing number of subleases on the market, such as offering furnishing at a tenant's request.
The size and length of leases are also both trending downward as companies look to adapt to more flexible schedules, with options like hoteling becoming the norm.
“It does seem that the most active is below 10K SF,” Glass said. “Tenant desirability right now is to be as flexible as possible.”
While Glass hasn’t noticed any increases in termination options at signing, smaller tenants are generally pushing for shorter lease terms, with larger tenants more likely to stick with longer agreements.
“Two to three years seems to be more the ideal timeline, where it used to be five or seven. It’s that short,” she said.
Glass said the larger spaces at 15K SF and up do tend to sit vacant longer, but there are two notable trends: Tenants want a great view of the city’s skyline and smaller suites.
“I’ve seen tenants go from 8K SF to 800 SF. I don’t think there’s a formula in place,” she said. “It will be interesting to see what that will all mean once people are more regular. This is all still fairly new.”