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San Francisco and Silicon Valley Office Markets Facing Differing Outlooks for the Short-Term

10/28/20

This report was provided by CBRE

While the tech industry overall has proven one of the most resilient during the pandemic, the unique composition of San Francisco and Silicon Valley’s tech sectors has led to a divergence in office market performance, according to CBRE’s annual Tech-30 report.

San Francisco scored well in several categories in the report, notching office-rent growth of 8.3% in the two years ended June 30 and a 26.9% increase in its tech-job base in 2018 and 2019 (second highest among all markets). Yet the market known for its high concentration of start-up and venture capital-backed tech firms was also pegged as the office market most at risk for rising sublease space. San Francisco had a 5.9% sublease availability rate in the second quarter of 2020 and the highest concentration of sublease availability from tech companies.

In contrast, Silicon Valley was named the tech market that is most resilient and poised for future growth. With its office market dominated by large-cap tech firms, Silicon Valley saw the fourth-greatest office rent growth across all markets at 11.6% in the two years ended June 30. It also ranked sixth for office space demand with a 4.7% gain in net absorption of office space in that timeframe. The Mountain View submarket posted the second lowest vacancy rate among all top submarkets in the second quarter of 2020, 3.2%, behind only South Lake Union in Seattle.

“The city of San Francisco contains the largest concentration of young start-up and public companies that have been significantly affected by the pandemic-related shutdowns. San Francisco also faces social distancing headwinds in the near-term in its density and reliance on public transit and vertical office towers. Yet real estate users and investors tend to make their decisions based on the long term, and history has shown us that turmoil always leads to innovation. San Francisco’s abundance of high-tech talent and venture capital remains the ideal ecosystem for producing the next crop of pioneering start-ups,” said Colin Yasukochi, Executive Director of CBRE’s Tech Insights Center.

Todd Husak, Managing Director leading CBRE’s Tech & Media Practice, added, “Even with a rise in remote work, many tech companies are still planning for future growth and looking to increase their office footprints. Pre-pandemic the Bay Area’s greatest real estate challenges were a lack of office space and high rents. The COVID-19-induced recession has released the pressure on both fronts, and we expect companies to take advantage of the opportunities created by increased office vacancy.”

While Bay Area firms have led the charge on expanding to other markets to diversify and grow their workforces, companies based in other markets have also expanded into the Bay Area for similar reasons. Since 2013, the largest contributors are Seattle (added 2.3 msf), Boston (1.1 msf) and New York (450k sf).

The Tech-30 report measures the industry’s impact on office demand and rents in the 30 leading tech markets in the U.S. and Canada. CBRE found that pre-pandemic office rents increased in all but one of those markets in the past two years (ending June 30), with five posting double-digit percentage gains. Net absorption – a measure of office space newly occupied in comparison to office space newly made available – registered net gains in 26 markets over those two years.




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