“The code is more what you call guidelines than actual rules.”
– Captain Barbosa explaining the Pirates Code
Like the Pirates code, asking rents are guidelines that landlords and their brokers give tenants as a customary starting point for rent negotiation. But don’t confuse asking rent guidelines with reality.
On March 17, 2020, San Francisco issued a stay-at-home order. According to CoStar, average office asking rents on that date in the San Francisco metro market were $64.55/RSF and total availability was near market equilibrium at 9.9%. Three years later, San Francisco has the highest sublease availability rate in the country. On St. Patrick’s Day 2023, market uncertainty caused by the pandemic had more than doubled total availability to a staggering 23.7%.
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. That, together with tenants moving to cheaper markets translates to lower demand for office space now, and potentially fewer office workers in the future.
Yet, contrary to the market reality caused by the pandemic, landlords have held on tightly to pre-COVID asking rents. On March 17, 2023, asking rents in the San Francisco metro market were down only 4.7% from the stay-at-home order of 2020 to $61.50/RSF.
The Market Reality
For the first time in a decade, tenants have gained negotiating leverage created by two years of pandemic. As tenant representatives we work exclusively with tenants. Never landlords. We recently negotiated a $32.00/RSF direct lease for Class B office space in San Francisco that had a 2020 starting rent of $56.00/RSF. Now, a 42.9% drop in negotiated rent from pre-pandemic may be an outlier but unlike some San Francisco asking rents, it’s to be believed.
Why are Asking Rents out of sync with Market Reality?
One of the dirty little secrets of the commercial real estate industry is that most big national brokerages represent both landlords and tenants. It is in the best interest of the brokers representing landlords to keep perceived rental rates as high as possible. Like the Pirates code, these asking rents are guidelines that aren’t to be trusted.
Brokers that specialize in tenant representation are only focused on finding value and multiple alternatives for their clients. Properties with unrealistic asking rents tend to come in with higher rent proposals than equal and comparable buildings. Fortunately, some San Francisco landlords are starting to break ranks with their peers and are setting more realistic asking rents. If you find a landlord looking to gouge you on rent before a lease is negotiated, consider yourself lucky to have identified the bad news early. Then, move on to a more realistic alternative.