The pandemic has brought the commercial real estate market in San Francisco to a new low, with work-from-home policies and office closures slowing Silicon Valley-driven business expansion to numbers not seen in at least three decades.
New office-leasing activity in 2020 dropped a staggering 71% compared with the year before, according to the real estate brokerage Cushman Wakefield, from 7.7m to 2.2m sq ft – the lowest since the early 1990s. Tenant demand also halved during the pandemic, from 6.6m sq ft to 3.3m sq ft.
“Vacancies have obviously climbed substantially,” said Robert Sammons, Cushman Wakefield’s senior director of Bay Area research, adding that more than half of the rise was driven by sublease vacancy, a common commercial space practice in San Francisco in which subleasers lease from a tenant, not a property manager. “That has never happened before in San Francisco,” he said.
The numbers emerge as the tech companies that fueled the office real-estate boom in the city – a boom that has contributed to the state’s affordable housing and construction crisis – re-evaluate the future of office culture and working from home.
Google will keep its employees home at least until July, while Pinterest paid nearly $90m to break a lease on an unbuilt, 500,000-sq ft office it no longer needs. Facebook has stated that it expects at least half of its employees will work remotely for the next five to 10 years, while Twitter announced it would let employees who wish to do so work from home “for ever”.
In September, Twitter listed nearly 105,000 sq ft of its Mid-Market neighborhood headquarters for sublease.
What this all means for San Francisco and its future as a capital for the tech industry is still unclear. A survey of thousands of tech workers in May found that two out of three employees would consider moving out of the Bay Area if given the opportunity to work remotely indefinitely. But Sammons said it was too soon to say if the pandemic had made any lasting changes to the tech industry or the fabric of office life in San Francisco.
When coronavirus vaccines began to be distributed, Sammons found that tenant demand in San Francisco had risen again to 4m sq ft. “We’re beginning to see a change, a mental change, if you will,” he said. “Now that vaccines are being rolled out, people can see the end. They realize they may want to reoccupy their spaces and continue to grow. They have more hope that this will be behind us toward the end of this year.”
Further sweetening the pot is that rental prices are now down for both office spaces and residences. Sammons believes that will draw people back to San Francisco and back to their offices.
“It’s about work culture,” Sammons said. “It’s about working around people who do the same thing you do. Will that pull exist when this is all behind us and the offices are back open, to be in that competitive mode again and to create that environment where they have to work with others? It’s a tricky question to answer. But I still think there’s still that desire and still that competition.”
The city has had a complicated relationship with Silicon Valley, with the abundant wealth coming in from tech deepening stark racial and societal inequities that existed well before the second dotcom boom. But the departure of this much wealth – during a time when San Francisco is projecting a $653.2m budget deficit – could be catastrophic as well.
Sammons doesn’t see it happening anytime soon. Venture capital funding hit record highs in the Bay Area this year, he pointed out. “There’s still a huge contingent of tech workers in the Bay Area,” he said. “The major tech players are and still will be headquartered here. That feeling that there are still so many tech players here, big or small, that if you don’t like it at Company A, you can move to Company B, or you can start your own company – that feeling is still there, that your opportunities are greater here in San Francisco than in other markets.
“It’s going to take a while to come out of this for San Francisco,” Sammons said. “But we’re still a tech market. We will remain one of the tech capitals of the world. There’s still a lot of churn as far as money goes in this market, and that will continue to be the case.”