Outbreak deals big blow to S.F. office market
The coronavirus epidemic closed down almost all San Francisco businesses and sent hundreds of thousands of workers home. Now, the city’s office market is facing the most uncertainty in more than a decade, although strength in the tech sector could help a recovery, according to experts.
Even before the outbreak, leasing activity slowed in the first quarter — though that was due to lack of available space, said Robert Sammons, Bay Area research director at brokerage Cushman & Wakefield.
San Francisco activity totaled 1.5 million square feet, the lowest quarterly level since 2015, he said. Only one lease, Deloitte’s renewal for more than 200,000 square feet at 555 Mission St., was more than 100,000 square feet. Preliminary firstquarter data from Cushman &
Wakefield released Wednesday was gathered before the impact of the virus.
The vacancy rate rose to 6.7% from 5.4% as more sublease space was listed, though vacancy is still among the lowest in the country, according to Cushman & Wakefield. Asking rents were stable compared to the end of last year at $82.60 per square foot annually, the highest in the country.
The impact of the virus is still uncertain.
“It is unknowable right now. There is no historical analog for something like this,” Kevin Thorpe, chief economist of Cushman & Wakefield, said in a conference call this week.
Some economists expect a sharp decline followed by a swift rebound that could limit damage to jobs and office demand. In contrast, the 2008 recession lasted 18 months and the recovery was weak for years.
“If it is slow and sharp … then I think there will be some office repercussions, but not anything near where we’ve seen in past recessions,” Thorpe said in an interview. “If this is extended, then I think some companies might take other actions” to cut costs and lay off workers.
CBRE, a commercial real estate brokerage, estimates that the economy will stabilize by the third quarter and a recovery will begin by the fourth quarter. National unemployment is expected to rise from 3.5% to over 5% by midyear with a loss of 3 million jobs. The recovery could be faster than 2008, thanks to stronger government intervention and pentup demand, CBRE said.
Large tech companies are expected to weather the storm and keep expanding, said Colin Yasukochi, executive director of CBRE’s Tech Insights Center.
The boom in video conferencing and online communication has helped local companies like Slack, Facebook, Google and Zoom. (Slack is headquartered in San Francisco, where Facebook and Google have large offices; Zoom is in San Jose.)
“It’s probably one of the more resilient sectors aside from consumer staples, such as food,” Yasukochi said. “It’s hard to conceive a scenario where the bottom falls out of rents like it did in the dotcom era. The major companies are probably going to get out of this OK.”
But it could be tougher for smaller and mediumsize startups — many of which aren’t profitable. Struggling companies could seek to cut costs and lay off workers, he said.
A recession, which was unthinkable just weeks ago but now seems almost certain, also could push more companies to relocate jobs into less expensive markets, an exodus that already was happening before the virus.
One of the biggest real estate moves this year was Macy’s February decision to close its online operations in South of Market, laying off 831 employees and listing 243,000 square feet for sublease. Macy’s will shift online operations to New York and lowercost Atlanta.
Available sublease space in San Francisco rose from 3.5 million square feet to 3.7 million square feet during the first quarter, indicating that more companies are slowing growth, said Alexander Quinn, Northern California research director at brokerage JLL.
Companies listing space include Uber, Collective Health, Dropbox and McKesson, which moved its headquarters from San Francisco to Texas in 2018.
Retailers like Macy’s likely will feel even more pain and could cut office jobs along with employees in stores, Yasukochi said.
Massive projects, including the redevelopment of the Flower Mart, the Tennis Club at 88 Bluxome, and a site at First and Harrison streets, were expected to receive building permits and start construction within the year. It isn’t clear iwhether the coronavirus will delay those projects.
“There’s definitely a pullback on risky activity and construction is a risky activity,” said Yasukochi, who added that he expects more developers to secure tenants before breaking construction.
The shortterm crisis could also prompt more companies to allow employees to work from home, which could lessen demand for offices entirely.
There is also much uncertainty over office rental payments, and whether tenants will be able to get rent reductions as workplaces are closed.
Marqeta, an Oakland tech company that manages online payments, said having 375 global employees work remotely has been successful. It’s now more open to hiring in places far from California.
“It has opened our eyes to how we could make a virtual model work. We’re now open to hire across borders. We’re not limited to the Bay Area,” said Vidya Peters, Marqeta’s chief operating officer.
Marqeta has been using Zoom, Slack and Google Hangouts to communicate and there haven’t been any major issues. The company has 41 open positions, with the majority in the Bay Area.
“The last few weeks have shown us that this can work across the company,” she said.
Peters said many engineers are enjoying having fewer distractions and completing tasks faster.
Another unresolved question is whether tenants will receive rent breaks if their offices remain closed due to government orders. Those negotiations will have to be resolved by lawyers, said Quinn of JLL.
“Nothing will be sorted out in immediate term,” Quinn said. “No one knows the depth and extent of COVID19,” the disease caused by the coronavirus.