Uptick in Reported Office Leasing Requirements Spurs Competition To Attract Tenants
By Nigel Hughes
The owners of office buildings in downtown San Francisco are holding a major sale, in some cases discounting rates to levels not seen in more than 10 years, just as signs of increased interest in office space are starting to emerge.
The average asking rent for downtown office space in the third quarter was $46 per square foot, 14% lower than the third quarter last year. That rent level was last seen in 2014, a year that turned out to be the middle of a decade-long boom that saw the city’s average office rents surge from an average of $25 per square foot in 2010 to almost $70 per square foot in 2020.
On an inflation-adjusted basis, the recent drop in rents is steeper, with the third-quarter average rent equivalent to asking rents in 2012. If the current rate of decline continues, asking rents are set to match the low point of the Great Recession within a matter of months.
Some recent listings in San Francisco suggest that average rents may have further to fall.
In early October, the new owner of 550 California St., Peninsula Land & Capital, put almost 300,000 square feet on the market with a full-service asking rent of $40 per square foot. The listing came just a few weeks after the building had sold at a discounted price of $40.5 million, or $114 per square foot.
The wide availability of sublet space continues to set the rent bar lower. Downtown San Francisco has around 9 million square feet of office sublet availability, with a wide selection of spaces across all quality levels. Recent listings include around 75,000 square feet at 760 Market St., offered on an industrial gross lease basis for just under $20 per square foot on a sublease that extends through December 2025.
A few blocks to the south, at 55 Hawthorne St., 17,000 square feet of direct space was recently listed for $29 per square foot full service.
The spate of office listings at lower rates comes just as local brokers report an increase in the amount of space that tenants are looking to fill. Tech companies and venture capital funds are investing heavily in AI startups, prompting several new lease signings in the past few weeks. A slew of AI companies, such as Hayden AI, Tome AI and Hex, have picked up sublease spaces in and around downtown San Francisco. In addition, Anthropic and Open AI are reported to be in negotiation to expand into multi-floor buildings, also taking sublease space that was vacated in the recent downturn.
In a market where high vacancy rates have already caused several owners to lose their buildings to lenders, there is tremendous pressure on building owners to price their vacant spaces at levels that compete with the heavily discounted sublease space that is available.
(Posted with permission from CoStar)