How a Market’s Greatest Strength became its Greatest Weakness
San Francisco’s proactive approach in the 2010s to luring companies away from Silicon Valley established the City as the new epicenter for the tech economy. Talent is the fuel for growth and young tech talent preferred working and living in the City. Companies with offices in San Francisco gained an important recruiting and retention advantage over those without. As a result, demand for office space in San Francisco was driven to new heights by tech companies in a decade long tech expansion cycle.
Prior to 2010 the City’s Financial District was historically tenanted by traditional businesses, professional service institutions, and Fortune 500 firms that were attracted to the large inventory of high-rise, Class A properties. Over the past decade tech firms and coworking space providers gradually expanded into the Financial District which more than doubled rents creating one of the country’s most expensive submarkets. As a result, many of the City’s traditional businesses and institutions were squeezed out of the Financial District.
Then, on March 17, 2020, San Francisco issued a stay-at-home order. According to CoStar, daily asking rents on that date in the Financial District submarket were $74.59/RSF and vacancy was very tight at 6.5%. Two years later, San Francisco had the highest sublease availability rate in the country. On St. Patrick’s Day 2022, market uncertainty caused by the pandemic had tripled vacancy in the Financial District to a staggering 19.8% and had driven down asking rents to $59.20/RSF.
In the slow recovery from the pandemic San Francisco, with a large population of work-from-anywhere friendly companies, sits at the bottom of major metros nationwide in return-to-office rates. The energy that attracted tech firm employees to working and living in the City became the very thing that employees of work-from-anywhere companies now want to avoid. In the midst of pandemic uncertainty, tech tenants began subleasing or giving back space while traditional businesses moved to cheaper markets creating lower demand for office space now, and potentially fewer office workers in the future.
Take a Step up in Class without a Step up in Cost
For the first time in a decade, tenants that were previously priced out of the highest quality spaces have gained negotiating leverage created by two years of pandemic. Office space with modern amenities in transit friendly locations can act as a catalyst for return-to-office initiatives as well as a competitive advantage for recruiting new talent.
As tenant representatives we work exclusively with tenants. Never landlords. We recently negotiated a direct lease for office space in San Francisco that was 42.9% below the 2020 starting rent for the same space. Now, a 42.9% drop in negotiated rent from pre-pandemic may be an outlier but it signals a shift in negotiating leverage from landlords to tenants.
Office tenants are finding landlords offering a large palette of concessions to make a lease more enticing. These most often take the form of free rent, deferred or reduced escalations, and tenant improvement allowances but may also include free parking, reduced security deposit, OPEX caps, and consent to sublease.
Despite the pandemic, talent remains the fuel for viability and growth. While some tech firms with work-from-anywhere policies struggle with the uncertainty around their need for office space, traditional businesses that want their employees to work from a central location can take advantage of the staggering vacancy rate and return to the Financial District while benefitting from a step up in class without a step up in cost.