San Francisco has lost its status as the country’s most expensive office rental market, with asking rents falling below Manhattan for the first time in five years.
Annual San Francisco rents dropped 14.8% over the past year to $75.32 per square foot in the first quarter, less than Manhattan’s asking rents of $75.99 per square foot, according to brokerage CBRE.
San Francisco’s rents overtook Manhattan at the end of 2015 as companies like Uber, Stripe and Twitter ushered in a new tech boom that reshaped the region’s skyline and economy.
The coronavirus pandemic has upended that growth, freezing almost all Bay Area office leasing for the last 12 months. San Francisco’s office vacancy rate has soared from 4% at the beginning of the pandemic to 19.7% at the end of March, according to CBRE. Manhattan has suffered as well, but its vacancy rate is lower at 12.5%.
“Both markets face a longer road to recovery given they’re high-density markets dependent on mass transit and international tourists,” said Colin Yasukochi, executive director of CBRE’s Tech Insights Center.
San Francisco’s current vacancy levels are similar to the early 2000s dot-com crash, but the situation is much different, Yasukochi said. The tech industry is far larger and anchored by massive public companies that have boomed during the pandemic, he said, while the first tech wave featured mostly companies without profits.
There are signs of an economic rebound for the Bay Area fueled in part by tech giants, with offices reopening and Facebook and Google expanding offices around the region. Vaccination rates are climbing and all Californians who are 16 and older will be eligible for vaccinations next week.
Still, the Bay Area and New York are among the country’s slowest regions to return to the office. Kastle Systems, which manages office security and keycard swipes, reported only 13.7% occupancy of its San Francisco area buildings, the lowest in the country. New York was second-lowest at 14.7%, while San Jose was at 16.5%. Cities dependent on car commuters have seen a higher rate of office workers return.
Sublease listings have shot up in San Francisco as companies like Salesforce, Dropbox and Twitter seek to reduce their office space, planning for more of their workers to remain remote beyond the pandemic. Sublease listings typically offer lower rents, at around 30% less than traditional vacancies, Yasukochi said.
Meanwhile, New York has benefited from its own tech growth. Last August, Facebook leased 730,000 square feet at the Farley Building, a sprawling former post office next to Penn Station — roughly equivalent to the entire Park Tower project that it leases in San Francisco. It was New York’s biggest lease of 2020. Tech firms Tik Tok and Apple also signed deals last year.
“I really feel that the tech industry has benefited pretty significantly through the pandemic,” Yasukochi said. “That growth is going to outpace the work-from-home trend over time. They’re going to need more space — that may not necessarily be in the Bay Area.”
A CBRE study of the top 100 tech leases last year found that Seattle, Manhattan, Washington, D.C., Atlanta and Austin all had more tech growth than the Bay Area. It’s the first time the Bay Area wasn’t the top region since CBRE began tracking tech leases in 2013.
But the Bay Area remains the epicenter of technology funding. Blockbuster initial public offerings like Airbnb and Roblox show that the tech industry remains strong, said Alexander Quinn, director of research for Northern California at JLL, a real estate brokerage. Venture capital investment was also a robust $33 billion in the Bay Area, including $20 billion in San Francisco, in the first quarter.
The question is how much remote work will cut into future office growth. “We do think it does shave off a portion of total demand,” he said.
Despite a quiet 2020, major San Francisco office projects like Pier 70 and 5M continue construction. The Parcel F tower project, next door to the Transbay transit center, is moving forward despite Salesforce’s lease cancellation.
“Manhattan has managed to record some major leases compared to San Francisco, which really has not. But San Francisco also is a much smaller market with rather dramatic downturns and recoveries. And with a couple of major leases, the switch could flip quickly,” said Robert Sammons, Northern California senior director of research at Cushman & Wakefield, a real estate brokerage.
Roland Li is a San Francisco Chronicle staff writer. Email: roland.li@sfchronicle.com Twitter: @rolandlisf
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S.F. loses status as most expensive U.S. office market, dropping below Manhattan after five years on top - San Francisco Chronicle
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