Vacancies Jump; Subleases Surge; Few White Elephants
by Guest Blogger Eli Ceryak
Senior Vice President
Cushman & Wakefield, San Francisco
Office Vacancies Jump to 7.3%
2016 continues to be one of the most fascinating years in recent memory for the San Francisco real estate market, with vacancy experiencing its biggest jump since early 2009. San Francisco office vacancy jumped to 7.3% at the end of June; a significant increase from the 5.6% number recorded at the end of March. It was also only the third time that quarterly vacancy has increased since the beginning of 2010.
The Subleasing Phenomenon
Vacant sublease space nearly doubled to 1.5 million square feet from 822,000 square feet at the end of the first quarter.
Of the available subleases, only five were 30,000 sf or larger; those accounted for 18% of the available square footage. The bulk of the sublease space consisted of availabilities between 10,000-30,000sf, with 43 different spaces totaling 706,000sf; those had an average size of 16,400sf and constituted 47% of the available space.
Twitter’s recent announcement of an additional 184,000 square feet of sublease at their mid-market headquarters will be a bellwether of the market. It’s the largest sublease available in San Francisco, and should prove attractive to large users whose options are largely limited to big blocks of direct space that required a significant investment in construction. Based on the lack of supply in this size range, we wouldn’t be surprised to see this leased prior to the end of the year.
” It’s worth noting that sublease space represents 26.4% of the total available space of 5.6 million square feet. This percentage is the highest it’s been in several years. “
Few White Elephants
Also worthy of note is that this market is not seeing an abundance of white elephants (An expensive, unprofitable investment that is difficult to sell). The sublease inventory currently available is, by and large, functional and not oversized, which will often limit the pool of potential buyers/users.
Despite this uptick in available space, we are still seeing strong demand in the sublease market. Based on the current level of activity, I expect sublease inventory to decrease slightly over the next quarter as many tenants focus on sublease opportunities with shorter terms, attractive pricing and minimal construction requirements.
During the month of July, we’ve already seen several companies dispose of large sublease blocks, including Neustar (70,000+ sf), Wells Fargo (36,000+ sf) and CPMC (27,000sf).
What’s Really Happening in the Tech Sector?
Surging growth in the tech sector has pushed rents to all-time highs and spurred the biggest office building boom in nearly 20 years. However, investor and media sentiment regarding the Bay Area tech sector turned negative early in the year; sending numerous stock prices down and creating speculation that the tech boom could be in its final stages. The recent uptick in vacancy is certainly fodder for those with a bearish view of the market.
Tech IPO Market
The tech IPO market has been essentially shut down, although one notable exception is San Francisco-based Twilio. Twilio is now valued at $4.3 billion or $52 per share, more than three times its $15 per share IPO price of just a month ago. One IPO doesn’t make a data set, but Twilio is demonstrating that investors will rally to businesses where they see discipline, sustainability and growth potential.
Mergers & Acquisitions
M&A activity continues to counter-balance the absence of an IPO market. Thus far many companies that have made significant acquisitions – such as Microsoft buying LinkedIn – have indicated that they’re going to keep space and talent in San Francisco, rather than moving jobs to corporate headquarters or cheaper locations.
” We anticipate M&A will continue to have a significant impact on Bay Area companies and their real estate needs. At the risk of stating the obvious, the M&A affect will largely depend on who acquires who, and where they decide to keep or relocate jobs. “
Conclusion: No Implosion; Less Frenzy
Finally, what we haven’t seen is significant dot-com style implosions or imminent collapse of financial institutions. Tech companies are retrenching, but in large part that’s applying needed financial discipline, with a focus on becoming sustainable businesses or building assets that are attractive to prospective buyers.
In short, for the near term I expect a market that’s less frenzied and more tenant-favorable, but still functional and reasonably stable.
Guest Blogger Eli Ceryak is a Senior Vice President and commercial broker for Cushman & Wakefield San Francisco. He represents a broad and eclectic client base, ranging from startup growth-stage tech companies to established Fortune 500 firms. Eli earned his undergraduate degree from Harvard University and received his Masters of Business Administration from the Walter. A Haas School of Business at University of California Berkeley. He has been published in Business Insider
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