Why Leasing Office Space in San Francisco Right Now is a Good Idea
Office space in San Francisco (Source: Pexels)
San Francisco’s commercial real estate market has seen dramatic changes within even just this past year. Recent statistics show that the vacancy rate of office space increased from 6.7% last year to 16.7% this year. Among many reasons, the primary reason for this is still due to the aftermath of the pandemic, with San Francisco being one of the slowest cities to bounce back economically from the viral disease.
Many of the businesses adopted a remote-hybrid modality of work. This change in office modality has caused rates to drop to ⅓ of what the rate used to be pre-pandemic. In 2020, the average Class A office lease was $92.24 per square foot per year. Currently in 2023, the average Class A office direct lease is now averaging at $57.19 per square foot per year. The sublease rate for Class A office space in San Francisco is currently at or below $35 per square foot per year. These vacancies have continued to drop rates and are expected to drop rates for another year.
Interestingly, the exact opposite effect that took a hold of office space has occurred in warehouse/industrial space. The demand for industrial space in San Francisco has continued to grow as a result of the pandemic. With vacancy rates actually falling from 3.2% last year to 2.4% this year. With the closing down of many in-person businesses, along with more time available to utilize on entrepreneurial goals, people started creating online stores and brands that cater to the same people who used to purchase these items in-person. The e-commerce boom has Covid-19 to thank for the demand increase of industrial space, to be utilized as warehousing and distribution facilities.
Right now San Francisco is in a weird spot where office space demand has decreased and industrial space has increased; the city that is known for being a technological hub now has a bountiful amount of office space available for a lower rate while industrial spaces have all been swept up in the e-commerce boom.
All the major tech companies downsizing their spaces or moving remote may show signs of the city not being able to bounce back but that isn’t the case. With the major tech companies and travel companies such as Uber, X (formerly known as Twitter), Linkedin, Slack, etc downsizing their footprint in San Francisco, a new underdog has come in to sweep up all the space left by these giants. A surge of AI firms have been moving into San Francisco and taking up office space by the dozen; within the past three months there have been a dozen deals signed for office space in downtown San Francisco. ChatGPT is in talks currently to take over 200,000 square feet from Uber. A cloud-based AI firm Hive is tripling its office footprint in downtown San Francisco. And a plethora of other companies are coming in to replace what has left.
So why is it a good time to lease space in San Francisco right now? Simply put, the rates are lower than ever before and are continuing to drop, the amount of office space in the city is increasing, and the city is on an upward trend back to its former glory. That’s all there is to it, no reading between the lines or having to read the fine print. The rates are low and there is a large amount of vacancies to choose from. Two strong avenues appear once you understand this trend.
New businesses that started during the pandemic are able to put their roots into a central location and continue to grow. Businesses that started during the pandemic and are continuing to grow should strongly consider securing office space to accommodate for growth as well as a footprint in a city where networking is the keystone to success.
Pre-pandemic small to medium sized business who were wanting to expand but couldn’t due to high rates and lack of space can now swoop in and take as much as they like for as low of a rate possible. Small to medium sized companies should secure a long term office pace with these low rates in mind so that they have room to grow and become the next giant that resides in the belly of San Francisco.
An added benefit to obtaining a lease in todays market is that landlords are more willing to allow tenant improvements and unconventional improvements to increase tenant retention as well as acquisition, such as lounges, showers, rent abatements, lowering the rates further, and even working with tenants to build their dream space out. All of these variables compound to give a solid foundation as to why leasing office space in San Francisco may not be such a bad idea in this market.
San Francisco has a strong historical trend of being able to bounce back, from the Dot-com bubble to the Great Recession, each time the city was able to find its footing again and come back stronger than before. Covid-19 is the same, San Francisco will bounce back and when it does, the winners are going to be the businesses who secured long term leases in office space with the low rates they are at now.
If you aren’t sold on leasing a space at this moment, you should go on as many tours as possible to see what options are available in the market. Once you find a space you’re interested in, keep an eye on it and see where the rates trend before you pull the trigger.