Flex Work Leaves San Francisco Trailing NYC in Office Comeback

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A fifth of all office space vacant. Tech companies looking to offload millions of square feet they’d previously leased. Rents down 14%.

The San Francisco office market, once among the most expensive and sought-after in the U.S., fell harder than just about anywhere in the country during the pandemic. Now, it’s getting left behind as other major cities see faster recoveries.

With a high proportion of employers allowing workers to do their jobs remotely, available office space in San Francisco keeps piling up -- with potentially huge ramifications for downtown small businesses, apartments and the local tax base. And, as the delta variant spreads, what momentum companies had in returning to the office is slowing.

“The tech tenants in San Francisco have been very flexible about working from home,” said Ryan Masiello, the co-founder and chief strategy officer at property-data firm VTS, which tracks office tours. “That’s probably one of the biggest drivers impacting demand.”

Already, Apple Inc. and Google -- which employ thousands of people in the Bay Area -- have pushed back their return-to-office dates, even as Wall Street banks like Goldman Sachs Group Inc. and JPMorgan Chase & Co. plow forward with getting workers into their Manhattan skyscrapers. San Francisco-based Lyft Inc. isn’t calling employees back until February, while Twitter Inc. shut its offices soon after after reopening.

Boston Properties Inc., one of the largest owners of top-tier office space in the U.S., said on an earnings call Wednesday that card swipes to access its buildings in San Francisco still trailed other markets, including New York and Boston. The same day, landlord Equity Residential said apartment demand is hurting from companies’ “ambiguous” return-to-office plans.

New York’s office market is still in a tenuous recovery, with lots of availability and many companies looking to sublease space. But interest from prospective tenants suggests something has shifted, as more employers eye a return to workplaces. In June, the city had reached 98% of pre-pandemic averages, according to VTS. Los Angeles climbed to 99%.

In San Francisco, tenant interest is just 68% of pre-Covid levels -- up significantly from a year ago, but still the lowest among seven cities VTS tracks. That includes Seattle and Boston -- which also have a high proportion of remote-friendly jobs.

Flex Work Leaves San Francisco Trailing NYC in Office Comeback

The tepid demand is colliding with a glut of space, as companies including Twitter, Uber Technologies Inc. and Salesforce.com Inc. market offices they no longer need. San Francisco’s vacancy rate topped 20% at the end of the second quarter, the highest level since 2003, according to Jones Lang LaSalle Inc. Direct asking rents are down 14% since their peak at the end of 2019, to $79.93 a square foot.

The subleases hitting the market slowed in the second quarter and some firms have decided to reoccupy space they’d previously marketed. VTS data also show that demand from tech tenants doubled from the first quarter to the second, and they’re seeking slightly larger spaces on average.

Yet the city’s vast amount of available space is quite a comedown for a market where tech giants like Facebook Inc. and Google used to vie for huge leases, sometimes even before buildings were finished.

In a report recapping second-quarter activity, brokerage Newmark Group called out several noteworthy leases. Few were household names. Among them: a nearly 100,000-square-foot deal by a company called Figma and another 54,000-square-foot agreement by Sigma Computing.

“The bulk of the demand is really coming from the unicorn, pre-IPO, set,” said Elizabeth Hart, a vice chairman at Newmark. “Many of them left the office markedly different companies than they are now.”

Some early-stage tech companies have grown so much during the pandemic that they can’t return to their previous offices, she said.

Tech Center

Bigger tech companies are likely to come back -- eventually.

Both Facebook and Google kept their space in San Francisco during the pandemic and have been rumored to be touring properties recently, said Nick Slonek, a principal and managing director at broker Avison Young, who’s worked in the city for three decades.

“No one is giving up on San Francisco,” he said. “We’ve been slow to recover, but I know personally my book of business is as busy as ever.”

A spokeswoman for Facebook, which has leased two office towers in the city in the past four years, said the company is “always evaluating our facilities and real estate needs” but doesn’t comment on rumors. A Google spokesperson declined to comment.

The Bay Area still remains a key place for the tech industry to recruit employees. That should remain true, even as some of the largest companies expand in Texas, New York and elsewhere. And falling rents may even draw in more companies that had balked at paying the city’s high prices.

“This is a good time to be opportunistic,” said Alexander Quinn, director of research for Northern California at JLL. “This is one of those few moments in San Francisco where it’s a tenant-favorable environment.”

©2021 Bloomberg L.P.

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