Large Block Office Demand Gap Narrowing in San Francisco

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June 2, 2016

By: Jack Nelson, Research Analyst

Appetite for San Francisco office space remains strong. According to our data, there were six large-block lease deals through the first four months of 2016. In April, the market saw three leases greater than 100,000 square feet including Lyft, Stripe, and Fitbit. These were deals that removed a significant amount of sublease space from the market at the time.

There are 14 large contiguous blocks of 100,000 square feet or more available to lease today, eight of which exist at present (i.e. are not under construction or renovation). The gap between large blocks and demand is narrowing: in October 2015 San Francisco had 26 tenants totaling 5.2 MSF of demand over 100,000 square feet and only 9 large blocks totaling 3.5 MSF of square feet available. In recent months, more space has become available as new construction has started, and additional subleases have come online. But, a number of large tenants continue to tour the market, and several large deals are anticipated to close in the coming weeks.

The chart below shows how the current cycle of corporate expansion compares to prior periods of expansion in San Francisco with regard to commercial office leases of 100,000 square feet or greater.

Historical SF Leases 100k+(May2016)

Finally, a word on subleases. Through May 23, 2016, there were 170 sublease spaces totaling 2.2MSF available in the city, up slightly from just over 2MSF the prior month but still below the market peak of 2.5MSF in 2009.

The largest added sublease space came from cosmetic firm Bare Escentuals — which in early May announced it intended to relocate its HQ to New Jersey by 2017. It has almost 80,000 square feet currently available for sublease at 71 Stevenson, the second largest sublease in the market today.  There are no blocks of sublease space over 100,000 s.f. available in the city.

The market will continue to see sublease space come online and will likely surpass 2009 levels, though remain much lower than the era.  Availabilities stem from firms looking to become more efficient with space, control growth expectations with VC capital remaining cautious, as well as retrenchment from firms focusing on profitability and restructuring business models. Demand for creative, quality sublease space will remain steady as growing firms continue to value limited capital expenditures opting for plug and play space.

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