San Francisco Office Recovery Won’t Start in 2021

San Francisco is still lying in wait for its office sector to spring back—but it might have to wait a little longer. A new report from Avison Young expects that the office vacancy rate will remain unchanged through the end of the year.

“The vacancy will continue to remain about the same as it has been this year. We won’t see improvements until the return-to-work plans of large San Francisco companies get implemented,” Nick Slonek, principal and managing director at Avison Young, tells GlobeSt.com. “While some sizable sublease and direct transactions are getting completed—Chime, CBS Interactive, Apple and Yelp, to name a few—it does not appear that vacancy will dip below current levels until early 2022.”

In addition to stagnant demand, San Francisco also had one of the largest sublease markets in the country during the pandemic. At the end of the second quarter, the city had 9.2 million square feet of sublease supply. Thankfully, some large users have started taking space back. “Some are pulling their sublease space off the market—including Adroll, Wish, Clarify Health and Keep Truckin—with forthcoming RTW plans; however, others such as Airbnb and Coinbase are putting more space on the market,” says Slonek. “The high amount of sublease space all trends back to the vaccination success and RTW strategies.  With the Delta variant, this is a very fluid time for tenants.  Facebook, Google and other major tech firms have pushed their RTW plans to 2022.”

There are signs of life emerging. For one, more companies are starting to tour mid-size spaces in the 15,000 to 40,000-square-foot range. “A lot of big users are also poking around.  Both landlords and tenants are optimistic about RTW,” says Slonek. “It is not a matter of if, but when. “Finally, with all the sublease space on the market, occupiers are attracted to the low upfront capex opportunities with shorter lease terms offering ultimate flexibility.”

For tenants looking to relocate or pursue office leasing, Slonek says that they need to have a strong workplace intelligence plan in place. “The post-COVID utilization of space can be a lot different than pre-pandemic,” he explains. “A user may be able to lease the same amount of space and accommodate 150% of their existing headcount,” he adds. “Things like shift schedules and WFH plans make for a more flexible square foot/employee ratio. With that said, a lot of companies are looking to put in more collaborative space to create better communication when certain teams or all hands are in the office.”

In addition, he is telling clients to hold back on capital expenditures. “We are advising tenants not spend unnecessary capital for infrastructure if they can take advantage of existing FF&E,” he says. “If they do want to build their own space, they should be very aware that construction materials, labor, permits, and FF&E all have long lead times so they need to make sure they budget realistic timing for occupancy.”