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San Francisco Office Market Sees Uptick in Sublease Offerings in Q1 2020


This San Francisco 1st Quarter 2020 office report was provided by real estate services firm Kidder Mathews

The San Francisco office market experienced a rise in sublease availability and lower levels of leasing activity in Q1 2020, partially driven by the COVID-19 crisis. Rental rates averaged $68.67 full service, a slight bump from the previous quarter’s rate of $67.10. Sale activity also fell this quarter, with transaction volume decreasing by 80% year-over-year.

New Construction

There were no office deliveries in the first quarter; however, an active development pipeline remains in San Francisco, with over 3.37 msf under construction. The largest project is First Street Tower, a massive 1.2 msf., 61-story office building in the South Financial District, diagonally across from Salesforce Tower. Developer Oceanwide Holdings halted construction last year and later announced it had placed the entire project on the market. In late Q1 2020, Hony Capital from Beijing agreed to purchase the project, which also includes residential and hotel components (the latter is planned to be a Waldorf Astoria location), for $1.2 bil, or approximately $1,000/sf.

Other notable projects include Related California’s 1500 Mission St, a 466k sf office project in the MidMarket neighborhood, scheduled to deliver in Q2 2020, and fully leased to the City of San Francisco. Uber’s new headquarters in the Mission Bay submarket (near the Chase Center) is expected to arrive in Q2 2020, with the ride-hailing company set to move into over 1 msf of high-quality Class A space. However, with the recent voter approval of Prop E, which limits office development in order to account for additional affordable housing in San Francisco, development now faces an uncertain future.

Asking Rental Rates

Steady tenant demand has caused direct rental rates to rise minimally, standing at an average of $68.67 full service. This represents a 2% increase from the previous quarter and an 8% rise YOY. At the end of the first quarter, the Financial District held the highest rate at $78.92 full service, followed by the Rincon/South Beach submarket at $77.26 full service. Class A rates in all submarkets averaged a high rate of $82.49 full service, with Class B and C rates rising moderately as well.

Leasing Activity & Absorption

Leasing activity slowed down in the first quarter, recording 1.32 msf. This is a sharp decrease from a year ago, where activity stood at 2.94 msf (a 55% drop). Consistent with prior quarters, the Financial and South Financial Districts dominated activity with a combined total of 794k sf. Co-working company Knotel completed the largest lease of the quarter by agreeing to sublease the entire 82.8k sf office building at 301 Brannan St. Next, eSports gaming company Skillz (represented by Kidder Mathews) subleased 51.7k sf at 505 Howard St, while the City and County of San Francisco agreed to a 49k sf office lease at 33 Gough St in the SoMa submarket.

The overall San Francisco office market posted a loss of just over 630k sf of direct net absorption at the end of the first quarter, significantly down from the previous quarter’s gain of 820k sf. Among the major submarkets to experience this effect were the South Financial District and Financial District, recording losses of 213.6k sf and 182.3k sf of direct absorption, respectively. Additionally, SoMa experienced a loss of 165.1k sf of absorption, largely due to tenants Ellation and TrustArc moving out of 110k sf of office space at 835 Market St.

Direct vacancy rates rose slightly in Q1 2020, up 50 basis points from the prior quarter to 4.7%. The Union Square submarket experienced the highest vacancy at 8.7%, with just over 14% of space available (including subleases). Class A spaces in all of San Francisco experienced the highest vacancy at 4.6%, followed closely by Class B spaces at 4.4%. Market-wide availability also increased to 11.4%, partially driven by the rise of sublease space in San Francisco (3.7% at quarter-end).


Sale volume posted $264 mil at the end of the first quarter, an 84% decrease from the prior quarter and an 80% loss YOY. The average price per square foot was $660, a 30% drop from 4Q19, while cap rates increased slightly by 30 basis points compared to the previous quarter. The largest sale this quarter was RFR Realty LLC’s acquisition of the historic Bently Reserve at 301 Battery Street for $143 mil, or $685/sf. The 208.7k sf office building was 94% leased at the time it was listed. Additionally, Lincoln Property Company and the Goldman Sachs-Merchant Banking Real Estate division purchased 1045 Sansome Street from Abbott Corporation for $69.5 mil, or $772/sf. This 90k sf creative office building in the Waterfront/North Beach submarket is close to 95% leased and will undergo improvements (improved common areas and suites) in the coming months. Lastly, San Francisco-based MXB Properties, LP acquired 451 Pacific Ave, a 10.3k sf office building, for $12.9 mil, or $1,251/sf in the Jackson Square neighborhood. 451 Pacific adds to MXB’s Jackson Square portfolio, which already included 717 Battery St.


The COVID-19 crisis has had a direct impact on San Francisco’s office market, slowing leasing activity and halting investment transactions. In February, the City and County of San Francisco declared a state of emergency and in mid-March announced a shelter in place order along with several other Bay Area counties. Multiple industries, notably retail, entertainment, and travel, have been hit the hardest, with many companies presenting layoffs to their employees. The Dow Jones fell sharply in late-March, sinking to one of its worst days since the 1987 “Black Monday” crash.

When this report went to print, landlords were being asked by tenants of all shapes, sizes, and types, both in-place and those negotiating for new leases, for a variety of concessions, including reduced rent, free rent, partial rent, more TIs, etc. Tenants that don’t need to sign leases are, by and large, holding off, which may further depress net absorption. Additionally, at least a few are re-thinking their office space needs entirely; now that nearly all have been forced to operate with everyone working from home, they are “doing the math” on workforce productivity v. rent, which is typically their 2nd largest expense after payroll.

It is a fast-moving and fluid environment, with highly individualized outcomes being negotiated between each tenant and landlord. Time will tell how the Covid-19 crisis ultimately affects rental rates and selling prices, though as of this writing, it would appear that the negotiating leverage has shifted to tenants & buyers, and particularly tenants who are open to subleases, which, as noted earlier, are increasing in availability.

Sources: CoStar, San Francisco Business Times, San Francisco Chronicle, CNBC. For more information contact: John Cha, Director of Research, 206.248.7300.

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